Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2710262 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.85 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 $2,130,000 in annual sales, with costs of $825,000. The project requires an initial investment in net working capital of $350,000, and the fixed asset will have a market value of $235,000 at the end of the project. If the tax rate is 34 percent, what is the project’s year 0 net cash flow? Year 1? Year 2? Year 3? (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts should be indicated by a minus sign.)
If the required return is 11 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))
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.85 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 $2,130,000 in annual sales, with costs of $825,000. The project requires an initial investment in net working capital of $350,000, and the fixed asset will have a market value of $235,000 at the end of the project. If the tax rate is 34 percent, what is the project’s year 0 net cash flow? Year 1? Year 2? Year 3? (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts should be indicated by a minus sign.)
Explanation / Answer
Keiper Inc. Year 0 Year 1 Year 2 Year 3 Initial cost (2,850,000) Net WC investment (350,000) Sales Revenue 2,130,000 2,130,000 2,130,000 Salvage value 235,000 Cost (825,000) (825,000) (825,000) Depreciation (950,000) (950,000) (950,000) Total cost (1,775,000) (1,775,000) (1,775,000) Income before Tax 355,000 355,000 590,000 Tax @34% 120,700 120,700 200,600 Post Tax income 234,300 234,300 389,400 Add back depreciation 950,000 950,000 950,000 Total Cash Inflow 1,184,300 1,184,300 1,339,400 Disconting factor @11% 1 0.901 0.812 0.731 PV of cash Flow 3,007,499 1,066,937 961,204 979,358 NPV (192,501) Year 0 Year 1 Year 2 Year 3 Cash Flow (3,200,000) 1,184,300 1,184,300 1,339,400 NPV (192,501)
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