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 $2.88 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 $2,140,000 in annual sales, with costs of $835,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $240,000 at the end of the project. If the tax rate is 35 percent, what is the projects year 0 net cash flow? Year 1? Year 2? Year 3? (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts should be indicated by a minus sign.) Years Cash Flow Year 0 $ Year 1 $ Year 2 $ Year 3 $ If the required return is 10 percent, what is the project's NPV?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Initial Investment = -2880000 - 360000 = -3240000

Annual Cash Inflow = (Sales - Cost - Depreciation)*(1-Tax Rate) + Depreciation = (2140000 - 835000 - 2880000/3)*(1-35%) + 2880000/3 = $1184250

Terminal Year (Year 3) Cash Inflow = Annual Cash Inflow + Recovery of Working Capital + Market Value*(1-Tax Rate) = 1184250 + 360000 + 240000*(1-.35) = 1700250

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Part B:

NPV = -3240000 + 1184250/(1+.10)^1 + 1184250/(1+.10)^2 + 1700250/(1+.10)^3 = $92732.91 or $92733.

Thanks.

Thanks.

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