Keiper, Inc., is considering a new three-year expansion project that requires an

Question

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.85 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,130,000 in annual sales, with costs of $825,000. The tax rate is 34 percent and the required return on the project is 11 percent. What is the projects NPV?

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.85 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,130,000 in annual sales, with costs of $825,000. The tax rate is 34 percent and the required return on the project is 11 percent. What is the projects NPV?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Initial Investment = -2850000

Annual Operating Cash Flows = (Sales - Costs - Depreciation)*(1-Tax Rate) + Depreciation = (2130000 - 825000 - 2850000/3)*(1-.34) + 2850000/3 = 1184300

NPV = -2850000 + 1184300/(1+.11)^1 + 1184300/(1+.11)^2 + 1184300/(1+.11)^3 = $44091.34

Answer is $44091.34.

Thanks.

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