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 $2.82 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 $2,120,000 in annual sales, with costs of $815,000. The project requires an initial investment in net working capital of $340,000, and the fixed asset will have a market value of $230,000 at the end of the project. If the tax rate is 30 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 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

NPV=?

Explanation / Answer

Year 0 = -2,820,000 - 340,000 = -3,160,000

Year 1 = 2,120,000*0.7 - 815,000*0.7 + 2,820,000/3*0.3 = 1,195,500

Year 2 = 2,120,000*0.7 - 815,000*0.7 + 2,820,000/3*0.3 = 1,195,500

Year 3 = 2,120,000*0.7 - 815,000*0.7 + 2,820,000/3*0.3 + 230,000*0.7 + 340,000 = 1,696,500

NPV = -3,160,000 + 1,195,500/1.12 + 1,195,500/1.12^2 + 1,696,500/1.12^3 = 67,991.19

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.