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 $2.64 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 $2,060,000 in annual sales, with costs of $755,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $270,000 at the end of the project. If the tax rate is 35 percent, what is the project

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 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 $2,060,000 in annual sales, with costs of $755,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $270,000 at the end of the project. If the tax rate is 35 percent, what is the project

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Initial Investment = -2640000 - 280000 = -2920000

Annual Cash Inflow = (Sales - Cost - Depreciation)*(1-Tax Rate) + Depreciation = (2060000 - 755000 - 2640000/3)*(1-.35) + 2640000/3 = 1156250

Terminal Year Cash Flow (Year 3) = Annual Cash Inflow + Recovery of Working Capital + Market Value*(1-Tax Rate) = 1156250 + 280000 + 270000*(1-.35) = 1611750

Table of Cash Flows:

Thanks.

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