Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2632703 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 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 $2,110,000 in annual sales, with costs of $805,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $225,000 at the end of the project. If the tax rate is 35 percent, what is the project
Explanation / Answer
Cash flow Year 0 = - 2790000 - 330000
Cash flow Year 0 = - $ 3,120,000
Annual Depriciation = 2790000/3 = $ 930,000
Annual Net Income before tax = 2110000 - 805000 - 930000 = 375000
Cash flow year 1 = 375000 * (1-0.35) + 930000
Cash flow year 1 = 1,173,750
Cash flow year 2 =375000 * (1-0.35) + 930000
Cash flow year 2 = 1,173,750
Cash flow year 3 = 375000 * (1-0.35) + 930000 + 330000 + 225000 * (1-0.35)
Cash flow year 3 = 1,650,000
NPV = -3120000 + 1173750/1.12 + 1173750/1.12^2 + 1650000/1.12^3
NPV = $ 38,134.79
Answer
Years Cash Flow Year 0 -3120000 Year 1 1173750 Year 2 1173750 Year 3 1650000 NPV 38134.39Related Questions
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