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

ID: 2716554 • Letter: K

Question

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.76 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,100,000 in annual sales, with costs of $791,000. The project requires an initial investment in net working capital of $320,000, and the fixed asset will have a market value of $220,000 at the end of the project.

  

Please count Net Cash Flow for year 3?????

If the required return is 12 percent, what is the project's NPV? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Please count NPV

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.76 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,100,000 in annual sales, with costs of $791,000. The project requires an initial investment in net working capital of $320,000, and the fixed asset will have a market value of $220,000 at the end of the project.

Explanation / Answer

Initial Investment / Cash Flow in year 0

                    = Cost of Equipment + Increase in working capital = 2760000 + 320000 =$3,080,000

Cash Flows in Years 1 and 2

               = (Sales - Production Costs - Depreciation) * (1 - Tax Rate) + Depreciation

Cash Flow in year 3

            = (Sales - Production Costs - Depreciation) * (1 - Tax Rate) + Depreciation + Recovery of Working Capital + After Tax Salvage Value

After Tax Salvage Value = Salvage Value - (Salavage Value - Book Value) * Tax Rate

                                         = 220000 - (220000 - 204516) * 0.34 = $214,735.44

Net Present Value is the sum of discounted cash flows = $86,355.68

Year Cost of Equipment Working Capital Sales Production Cost Depreciation (%) Depreciation Book Value Salvage Value After Tax Salvage Value Cash Flow Discounted Cash Flow at 12% 0 2760000 320000 0 0 0 0.00 2760000.00 0 0 -3080000 -3080000 1 0 0 2100000 791000 33.33% 919908.00 1840092.00 0 0 1176708.72 1050632.79 2 0 0 2100000 791000 44.45% 1226820.00 613272.00 0 0 1281058.80 1021252.23 3 0 -320000 2100000 791000 14.81% 408756.00 204516.00 220000 214735.44 1537652.48 1094470.66 NET PRESENT VALUE 86355.68