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 project requires an initial investment in net working capital of $300,000, and the fixed asset will have a market value of $210,000 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 12 percent, what is the project's NPV?

Explanation / Answer

Year 0 Year 1 Year 2 Year 3 NPV OCF Assets sale Investment -2.7 sales 2.08 NetWorking Capital -0.3 Cost 0.775 Total Investment -3 Depreciation 0.9 OCF 1.16325 1.16325 1.16325 Revenue 0.405 0.21 35% NWC 0.3 Tax @ 35% 0.14175 0.0735 Assets sale 0.1365 Revenue after tax 0.26325 0.1365 Total -3 1.16325 1.16325 1.59975 Add back depreciation 0.9 PVF @ 12% 1 0.8929 0.7972 0.7118 OCF 1.16325 0.1365 Present Value -3 1.038616 0.927336 1.13867 0.104622

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.