Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2696737 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 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 $2,110,000 in annual sales, with costs of $805,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $225,000 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 $2.79 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 $2,110,000 in annual sales, with costs of $805,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $225,000 at the end of the project. If the tax rate is 35 percent, what is the project
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Similar question :
Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.134 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will be worthless. The project is estimated to generate $1,008,000 in annual sales, with costs of $403,200. If the tax rate is 33 percent and the required return on the project is 12 percent, the NPV for this project is
Solution :
Sales 1,008,000 less Cost 403,200 = 604,800 x 67% = 405,216 annualcash flow
Depreciation 378,000 x 33% = 124,740 annual tax savings from deprc.
Total annual cash flow = 405,216 + 124,740 = 529,956
(OR 604,800 - 378,000 = 226,800 x 67% = 151,956 + 378,000 = 529,956)
PV of Annuity of 529,956, N 3, R 12% = 1,272,865
NPV = Negative 138,865
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