Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2451417 • 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.
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 $2.76 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
Calculation of Project's net cash Flows
Year 0
Year 1
Year 2
Year 3
Initial fixed asset investment
$ (2,760,000.00)
Initial investment in net working capital
$ (320,000.00)
Tax Saving on depreciation = Dep * 34%
$ -
$ 312,768.72
$ 417,118.80
$ 138,977.04
Annual Sales (Net of Tax) = 2100000*(1-34%)
$ 1,386,000.00
$ 1,386,000.00
$ 1,386,000.00
Annual Costs (Net of Tax) = 791000*(1-34%)
$ (522,060.00)
$ (522,060.00)
$ (522,060.00)
Terminal Value of Assets (Net of tax) = (220000 - 2760000*7.41%)*(1-34%)
$ 10,219.44
Net cash Flows
$ (3,080,000.00)
$ 1,176,708.72
$ 1,281,058.80
$ 1,013,136.48
Workings:
MACRS Depreciation and tax saving calculation:
Year 1
Year 2
Year 3
Cost of Asset
$ 2,760,000.00
$ 2,760,000.00
$ 2,760,000.00
MACRS Depreciation %
33.33%
44.45%
14.81%
Depreciation = Cost * Dep %
$ 919,908.00
$ 1,226,820.00
$ 408,756.00
Tax Saving on depreciation = Dep * 34%
$ 312,768.72
$ 417,118.80
$ 138,977.04
Calculation of Project's NPV
Year 0
Year 1
Year 2
Year 3
Net cash Flows (CF)
$ (3,080,000.00)
$ 1,176,708.72
$ 1,281,058.80
$ 1,013,136.48
PVF (12%)
1.00000
0.89286
0.79719
0.71178
PV = CF *PVF
$ (3,080,000.00)
$ 1,050,632.79
$ 1,021,252.23
$ 721,130.53
NPV = Sum of PVs
$ (286,984.45)
Calculation of Project's net cash Flows
Year 0
Year 1
Year 2
Year 3
Initial fixed asset investment
$ (2,760,000.00)
Initial investment in net working capital
$ (320,000.00)
Tax Saving on depreciation = Dep * 34%
$ -
$ 312,768.72
$ 417,118.80
$ 138,977.04
Annual Sales (Net of Tax) = 2100000*(1-34%)
$ 1,386,000.00
$ 1,386,000.00
$ 1,386,000.00
Annual Costs (Net of Tax) = 791000*(1-34%)
$ (522,060.00)
$ (522,060.00)
$ (522,060.00)
Terminal Value of Assets (Net of tax) = (220000 - 2760000*7.41%)*(1-34%)
$ 10,219.44
Net cash Flows
$ (3,080,000.00)
$ 1,176,708.72
$ 1,281,058.80
$ 1,013,136.48
Workings:
MACRS Depreciation and tax saving calculation:
Year 1
Year 2
Year 3
Cost of Asset
$ 2,760,000.00
$ 2,760,000.00
$ 2,760,000.00
MACRS Depreciation %
33.33%
44.45%
14.81%
Depreciation = Cost * Dep %
$ 919,908.00
$ 1,226,820.00
$ 408,756.00
Tax Saving on depreciation = Dep * 34%
$ 312,768.72
$ 417,118.80
$ 138,977.04
Calculation of Project's NPV
Year 0
Year 1
Year 2
Year 3
Net cash Flows (CF)
$ (3,080,000.00)
$ 1,176,708.72
$ 1,281,058.80
$ 1,013,136.48
PVF (12%)
1.00000
0.89286
0.79719
0.71178
PV = CF *PVF
$ (3,080,000.00)
$ 1,050,632.79
$ 1,021,252.23
$ 721,130.53
NPV = Sum of PVs
$ (286,984.45)
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