2D1C WEBSTER PRODUCTS IS PERFORMING A CAPITAL BUDGETING ANALYSIS ON A...
308.
CSO: 2D1c
LOS: 2D1c
Webster Products is performing a capital budgeting analysis on a new product it is
considering. Annual sales are expected to be 50,000 units in the first year, 100,000 units
in the second year, and 125,000 units the year thereafter. Selling price will be $80 in the
first year and is expected to decrease by 5% per year. Annual costs are forecasted as
follows.
Fixed costs
$300,000 each year
Labor cost per unit
$20 in year 1, increasing 5% per year, thereafter
Material cost per unit
$30 in year 1, increasing 10% per year, thereafter
The investment of $2 million will be depreciated on a straight-line basis over 4 years for
financial reporting and tax purposes. Webster’s effective tax rate is 40%. When
calculating net present value (NPV), the net cash flow for year 3 would be
a.
$558,750.
b.
$858,750.
c.
$1,058,750.
d.
$1,070,000.