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 $2.67 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 $2,070,000 in annual sales, with costs of $765,000. The project requires an initial investment in net working capital of $290,000, and the fixed asset will have a market value of $265,000 at the end of the project. If the tax rate is 34 percent, what is the project

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Initial Investment = -2670000 - 290000 = -2960000

Annual Cash Inflow = (Sales - Cost - Depreciation)*(1-Tax Rate) + Depreciation = (2070000 - 765000 - 2670000/3)*(1-.34) +2670000/3 = 1163900

Terminal Year Cash Flow = Annual Cash Inflow + Recovery of Working Capital + Market Value*(1-Tax Rate) = 1163900 + 290000 + 265000*(1-.34) = 1628800

Table:

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Part B:

NPV = -2960000 + 1163900/(1+.13)^1 + 1163900/(1+.13)^2 + 1628800/(1+.13)^3 = $110344.53

Thanks.

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