Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2627063 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.46 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 $2,000,000 in annual sales, with costs of $695,000. The tax rate is 35 percent and the required return on the project is 16 percent. What is the project
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.46 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 $2,000,000 in annual sales, with costs of $695,000. The tax rate is 35 percent and the required return on the project is 16 percent. What is the project
Explanation / Answer
Initial investment = $2.46 million
Depreciation per year = 2.46/3 = $.82 million = .82*1000000 = $820000
Operating net cash flow = 2000000-695000 = $1305000
after tax cash flow = (1305000-820000)*(1-.35)+820000 = $1135250
NPV = -2460000+(1135250/1.16^1)+(1135250/1.16^2)+(1135250/1.16^3) = $89646.10
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