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.