NOTE: File naming requirement: Take-home Exercise No. X - Group No.

X
Take-home Exercise No. 2
Your company has been doing well, reaching $1 million in earnings, and is considering
launching a new product. Designing the new product has already cost $500,000. The
company estimates that it will sell 740,000 units per year for $6.5 per unit and variable
non-labor costs will be $1.75 per unit. Production will end after year 3. New equipment
costing $1 million will be required. The equipment will be put into use in year 1 and
depreciated to zero 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 $305,000.
The new product will require the working capital to increase to a level of $450,000
immediately, then to $485,000 in year 1, in year 2 the level will be $320,000, and finally
in year 3 the level will return to $305,000. Your tax rate is 21%. The discount rate for
this project is 10%. Do the capital budgeting analysis for this project and calculate its
NPV.