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 $2.76 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 $2,100,000 in annual sales, with costs of $795,000. The project requires an initial investment in net working capital of $320,000, and the fixed asset will have a market value of $220,000 at the end of the project. If the tax rate is 34 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.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Initial Investment (Year 0 Cash Flow) = -2760000 - 320000 = -3080000

Annual Cash Inflow = (Sales - Costs - Depreciation)*(1-Tax Rate) = (2100000 - 795000 - 2760000/3)*(1-.34) + 2760000/3 = 1174100

Terminal Year Cash Inflow = Annual Cash Inflow + Recovery of Working Capital + Market Value*(1-Tax Rate) = 1174100 + 320000 + 220000*(1-.34) = 1639300

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Table of Cash Flows:

Thanks.

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