Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2644365 • Letter: K
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
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
Initial Investment = initial fixed asset investment + initial investment in net working capital
Initial Investment = 2940000 + 380000
Initial Investment = $ 3320000
Annual Depreciation = initial fixed asset investment/three-year tax life
Annual Depreciation = 2940000/3
Annual Depreciation = 980000
Annual operating Cash Flow = (Annual sales - Annual Cost) * (1-tax rate) + Annual Depreciation* tax rate
Annual operating Cash Flow = ( 2160000-855000)*(1-34%) + 980000*34%
Annual operating Cash Flow = 1194500
Terminal Value = Working capital recovered + post tax salavage Value
Terminal Value = 380000 + 250000*(1-34%)
Terminal Value = $ 545000
Cash Flow in Year 0 = - $ 3,320,000
Cash Flow in Year 1 = $ 1,194,500
Cash Flow in Year 2 = $ 1,194,500
Cash Flow in Year 3 = 1194500 + 545000
Cash Flow in Year 3 = $ 1,739,500
Answer
If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
NPV = - Intial Investment + Year 1 Cash Flow/(1+ required return)+ Year 2 Cash Flow/(1+ required return)^2 + Year 3 Cash Flow/(1+ required return)^3
NPV = -3320000 + 1194500/1.10 + 1194500/1.10^2 + 1739500/1.10^3
NPV = $ 60,011.27
Years Cash Flow Year 0 - 3,320,000 Year 1 1,194,500 Year 2 1,194,500 Year 3 1,739,500Related Questions
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