Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2761198 • Letter: K
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 falls into the three-year MACRS class. 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 1 net cash flow? Year 2? Year 3? (Use MACRS) (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
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))
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset falls into the three-year MACRS class. 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 1 net cash flow? Year 2? Year 3? (Use MACRS) (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Years Cash Flow Year 0 $ Year 1 $ Year 2 $ 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))
NPV $Explanation / Answer
Year sales cost depreciation profit before tax tax Profit after tax depreciation cash inflow
1 2080000 775000 $899910 405090 141782 263308 $899910 1163218
2 2080000 775000 $1200150 104850 36698 68152 $1200150 1268302
3 2080000 775000 $399870 905130 316796 588334 $399870 988204
3 $300,000(working capital)
3 210000(sale)
PVF(12%, nyears) present value
0.893 1038753.67
0.797 1010836.69
0.712 703601.25
0.712 213600
0.712 149520
$3116311.61
Present value of cash outflow:
=2700000 + 300000 + tax profit on sale[9930* 35%]
= 2700000 + 300000 + 3475.5
= $3003475.5
NPV = $3116311.61 - $3003475.5
= $112836.11
Note:- Depreciation as per MACR
cost Depreciation
year 1 2700000 2700000*33.33% = $899910
2 2700000 2700000* 44.45%= $1200150
3 2700000 2700000* 14.81% =$399870
4 2700000 2700000 *7.41% = $200070
Profit / (loss) on sale = Book value - sale
= [2700000 - ($899910 + $1200150 + $399870)] - $210000
= (2700000 - 2499930) - 210000
=200070 - 210000
= 9930 (profit)
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