Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2637772 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 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 $2,050,000 in annual sales, with costs of $745,000. The project requires an initial investment in net working capital of $270,000, and the fixed asset will have a market value of $275,000 at the end of the project. If the tax rate is 30 percent, what is the project
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 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 $2,050,000 in annual sales, with costs of $745,000. The project requires an initial investment in net working capital of $270,000, and the fixed asset will have a market value of $275,000 at the end of the project. If the tax rate is 30 percent, what is the project
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Initial Investment = -2610000 - 270000 = -2880000
Annual Cash Inflow = (Sales - Variable Cost - Depreciation)*(1-Tax Rate) + Depreciation = (2050000 - 745000 - 2610000/3)*(1-.30) + 2610000/3 = 1174500
Terminal Year Cash Inflow = Annual Cash Inflow + Recovery of Working Capital + Market Value*(1-Tax Rate) = 1174500 + 270000 + 275000*(1-.30) = 1637000
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Part B:
NPV = -2880000 + 1174500/(1.15)^1 + 1174500/(1.15)^2 + 1637000/(1.15)^3 = $105749.16
Thanks.
Years Cash Flow Year 0 -2880000 Year 1 1174500 Year 2 1174500 Year 3 1637000Related Questions
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