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

ID: 2719353 • Letter: K

Question

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 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 $2,060,000 in annual sales, with costs of $755,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $270,000 at the end of the project. If the tax rate is 35 percent, what is the project’s year 0 net cash flow? Year 1? Year 2? Year 3?

  


If the required return is 13 percent, what is the project's NPV?

  Years Cash Flow   Year 0 $   Year 1 $   Year 2 $   Year 3 $

Explanation / Answer

Statemnet showing Cash flows Particulars Time PVf@13% Amount PV Cash Outflows                                  -                       1.00        (2,640,000.00) (2,640,000.00) Cash Outflows                                  -                       1.00            (280,000.00)       (280,000.00) PV of Cash outflows (2,920,000.00) Cash inflows                           1.00                0.8850           1,156,250.00      1,023,230.09 Cash inflows                           2.00                0.7831           1,156,250.00         905,513.35 Cash inflows                           3.00                0.6931           1,156,250.00         801,339.25 Cash inflows(WC)                           3.00                0.6931              280,000.00         194,054.05 Cash inflows(Salvage Value)                           3.00                0.6931              175,500.00         121,630.30 PV of Cash Inflows      3,045,767.04 NPV         125,767.04 Annual Sales          2,060,000.00 Costs              755,000.00 Income before dep and tax          1,305,000.00 Depreciation = 2640,000/3            (880,000.00) Income before tax              425,000.00 Tax @35%              148,750.00 Income after Tax              276,250.00 Depreciation = 2640,000/3              880,000.00 Cash Flows after tax          1,156,250.00 Sale Value of FA              270,000.00 Tax @35%                94,500.00 Sale Value net of tax              175,500.00 Particulars                                -                       1.00                           2.00                      3.00 Cash flows        (2,920,000.00)    1,156,250.00           1,156,250.00      1,611,750.00