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 $2.94 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 $2,160,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $250,000 at the end of the project. If the tax rate is 34 percent, what is the project

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Initial Investment = -2940000 - 380000 = -3320000

Annual Cash Inflow = (Sales - Cost - Depreciation)*(1-Tax Rate) + Depreciation = (2160000 - 855000 - 2940000/3)*(1-34%) + 2940000/3 = $1194500

Terminal Year (Year 3) Cash Inflow = Annual Cash Inflow + Recovery of Working Capital + Market Value*(1-Tax Rate) = 1194500 + 380000 + 250000*(1-.34) = 1739500

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Part B:

NPV = -3320000 + 1194500/(1+.10)^1 + 1194500/(1+.10)^2 + 1739500/(1+.10)^3 = $60011.27 or $60011.

Thanks.

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