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 $2.55 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 $2,030,000 in annual sales, with costs of $725,000. The tax rate is 35 percent and the required return on the project is 15 percent. What is the project

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.55 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 $2,030,000 in annual sales, with costs of $725,000. The tax rate is 35 percent and the required return on the project is 15 percent. What is the project

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Initial Investment = -2550000

Annual Operating Cash Flows = (Sales - Costs - Depreciation)*(1-Tax Rate) + Depreciation = (2030000 - 725000 - 2550000/3)*(1-.35) + 2550000/3 = 1145750

NPV = -2550000 + 1145750/(1+.15)^1+ 1145750/(1+.15)^2 + 1145750/(1+.15)^3 = $66005.18

Answer is $66005.18.

Thanks.

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