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 $2.49 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 $2,010,000 in annual sales, with costs of $705,000. The project requires an initial investment in net working capital of $230,000, and the fixed asset will have a market value of $295,000 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?

Explanation / Answer

                                            -                                    1                                  2                                  3 Initial Cost                     (2,490,000.00) Increase in NWC                         (230,000.00) Annual sales           2,010,000.00           2,010,000.00           2,010,000.00 Annual costs            (705,000.00)            (705,000.00)            (705,000.00) Depreciation            (830,000.00)            (830,000.00)            (830,000.00) Net incmoe               313,500.00               313,500.00               313,500.00 After tax Salvage value               194,700.00 Recovery of NWC               230,000.00 Net cash flows -2,720,000.00           1,143,500.00           1,143,500.00           1,568,200.00

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