Keiper, Inc., is consdering a new three-year expansion project that requires an

Question

Keiper, Inc., is consdering a new three-year expansion project that requires an inital fixed asset investment of $2.97 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,170,000 in annual sales, with coss of $865,000. The project requires an inital investment in net working capital $390,000, and the fixed asset will have a market value of $255,000 at the end of the project. If the tax rate is 35 percent, what is the projecct's year 0 net cash flow? year 1? year 2? and year 3?

Year 0

year 1

year 2

Year 3

If the required return in 9 percent, what is the project's NPV?

Explanation / Answer

Note:

1. Calculation of Net Income

Year Capital Working Capital Depreciation Net Income Net Cashflow PV Factor @ 9% Present Value 0 (2,970,000.00) (390,000.00) (3,360,000.00) 1.000000000 (3,360,000.00) 1 (990,000.00) 204,750.00 1,194,750.00 0.917431193 1,096,100.92 2 (990,000.00) 204,750.00 1,194,750.00 0.841679993 1,005,597.17 3 165,750.00 390,000.00 (990,000.00) 204,750.00 1,750,500.00 0.772183480 1,351,707.18 Net Present Value 93,405.27

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