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 $2.55 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 $2,030,000 in annual sales, with costs of $725,000. The project requires an initial investment in net working capital of $250,000, and the fixed asset will have a market value of $285,000 at the end of the project. If the tax rate is 35 percent, what is the project's 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.)

If the required return is 15 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))

  Years Cash Flow   Year 0 $      Year 1 $      Year 2 $      Year 3 $   

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Initial Investment = -2550000-250000 (initial working capital) = -2800000

Annual Cash Inflows = (Sales - Cost - Depreciation)*(1-Tax Rate) + Depreciation = (2030000-725000-2550000/3)*(1-35%)+2550000/3 = 1145750

Terminal/Final Year Cash Inflow = Annual Cash Inflow + Recovery of Working Capital + Market Value*(1-Tax Rate) = 1145750 + 250000 + 285000*(1-35%) = 1581000

Annual Cash Inflow Table:

Part B:

NPV = -2800000 + 1145750/(1+.15)^1 + 1145750/(1+.15)^2 + 1581000/(1+.15)^3 = 102189.12

Thanks.

Year Cash Flow 0 2800000 1 1145750 2 1145750 3 1581000

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