Finance Question

Question

Your company has been doing well, reaching $1.06 million in annual earnings, and is considering launching a new product. Designing the new product has already cost $478,000. The company estimates that it will sell 768,000 units per year for $2.95 per unit and variable non-labor cost will be $1.03. Production will end after year 3. New equipment costing $1.09 million will be required. The equipment will be depreciated using the 7-year MACRS schedule. You plan to sell the equipment for book value at the end of year 3. Your current level of working capital is $297,000. The new product will require the working capital to increase to a level of $378,000 immediately, then to $400,000 in year 1, $348,000 in year 2, and finally return to $297,000. Your tax rate is 35%. The discount rate for this project is 10.1%. Do the capital budgeting analysis for this project and calculate its NPV.

Answer 1

I can do this in my sleep, but usually charge $150 per hour for my Operations Management clients. If I solved this question for you, I could not only give you the answer AND documentation you require, but also alternative scenarios that would include not having to use the protracted tax rate. And, of course, you have omitted the all-important "cost of money" or "carrying charges" for the model. In other words, one of the following is true:

 

1. You are either working for a company in a financial capacity (or are the company owner), or

2. Your instructor does not understand the basics of CapEx finance (or has never worked in industry)

 

You would never get this type of question - at least without the required inputs - from any secondary educational institutional undergrad or post-grad advanced finance/financial engineering department.