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 $2.40 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 $1,980,000 in annual sales, with costs of $675,000. The project requires an initial investment in net working capital of $200,000, and the fixed asset will have a market value of $310,000 at the end of the project.

If the tax rate is 34 percent, what is the projects year 0 net cash flow? Year 1? Year 2? Year 3? (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts should be indicated by a minus sign.) SHOW YOUR WORK

If the required return is 18 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) SHOW YOUR WORK

If the required return is 18 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) SHOW YOUR WORK

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Initial Investment = - 2400000-200000 = -2600000

Annual Cash Inflow = (Sales - Cost - Depreciation)*(1-Tax Rate) + Depreciation = (1980000 - 675000 - 2400000/3)*(1-.34) + 2400000/3 = 1133300

Year 0 Cash Inflow = -2600000

Year 1 Cash Inflow = 1133300

Year 2 Cash Inflow = 1133300

Year 3 Cash Inflow = 1133300 + 200000 [Recovery of Working Capital] + 310000*(1-.34) [Market Value After Tax] = 1537900

Part B:

NPV = -2600000 + 1133300/(1+.18)^1 + 1133300/(1+.18)^2 + 1537900/(1+.18)^3 = 110355.56

Thanks.

Thanks.

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