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 $2.7 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 $2,080,000 in annual sales, with costs of $775,000. The tax rate is 35 percent and the required return on the project is 12 percent. What is the project

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 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 $2,080,000 in annual sales, with costs of $775,000. The tax rate is 35 percent and the required return on the project is 12 percent. What is the project

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Investment = -2700000

Annual Cash Inflow = (Sales - Costs - Annual Depreciation)*(1-Tax Rate) + Annual Depreciation = (2080000 - 775000 - 2700000/3)*(1-.35) + 2700000/3 = 1163250

NPV = -2700000 + 1163250/(1+.12)^1 + 1163250/(1+.12)^2 + 1163250/(1+.12)^3 = 93930.22

Answer is 93930.22 or 93930.

Thanks.

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