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 $2.40 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 $1,980,000 in annual sales, with costs of $675,000. The tax rate is 34 percent and the required return on the project is 18 percent. What is the project

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.40 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 $1,980,000 in annual sales, with costs of $675,000. The tax rate is 34 percent and the required return on the project is 18 percent. What is the project

Explanation / Answer

Depreciation = 2,400,000/3 = 800,000

Annual cashflow = (sales-cost)*(1-tax rate) + depreciation * tax rate = (1,980,000-675,000)*(1-34%) + 800,000 * 0.34 = 1,133,300

Present value of the 3 cashflows = 1,133,300 / (1+18%)^1 + 1,133,300 / (1+18%)^2 + 1,133,300 / (1+18%)^3 = 2,464,104

NPV = 2,464,104 - 2,400,000 = $ 64,103.51

Hope this helped ! Let me know in case of any queries.

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