Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2632591 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.91 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 $2,150,000 in annual sales, with costs of $845,000. The project requires an initial investment in net working capital of $370,000, and the fixed asset will have a market value of $245,000 at the end of the project. If the tax rate is 30 percent, what is the project
Explanation / Answer
Annual Dep= 2910000/3= $970000
Cashflow at year 0= 2910000+370000= $3280000
Annual cashflow= (2150000-845000-970000)*.7 +970000= $1204500
Additional CF for 3rd year
Profit on asset= 245000*.7= $171500
Recapture inital increase in WC= 37000
Total CF in year3= 1204500+171500+37000= $1746000
NPV= -3280000+1204500/1.11+1204500/1.11^2+1746000/1.11^3= $ 59394.5077
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