Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2629890 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.00 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,180,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $400,000, and the fixed asset will have a market value of $260,000 at the end of the project.
If the tax rate is 30 percent, what is the project
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.00 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,180,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $400,000, and the fixed asset will have a market value of $260,000 at the end of the project.
Explanation / Answer
year 1 year 2 year 3 investment 3000000 3000000 3000000 useful life 3 years 3 years 3 years depreciation 999900 1333500 444300 cash flow every year sales 2180000 2180000 2180000 Less : cost 855000 855000 855000 profit before tax 1325000 1325000 1325000 less : tax 397500 397500 397500 net profit 927500 927500 927500 add : tax savings on depreciation 299970 400050 133290 free cash flow 1227470 1327550 1060790 note that it is just mentioned that the market value of asset is 260000 and not that it is sold hence the tax benefit and sales proceeds from disposal is not considered. year 0 year 1 year 2 year 3 investment -3000000 working capital -400000 free cashflow 1227470 1327550 1060790 working capital released 400000 total -3400000 1227470 1327550 1460790 Dcf @ 9% 1.00 0.92 0.84 0.77 disc cash flow -3400000 1126119.27 1117372.28 1127997.91 -28510.55 NPV is -28510.55
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