5. value: 11.11 points Keiper, Inc., is considering a new three-year expansion p

Question

5.

value:
11.11 points

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.00 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 $2,180,000 in annual sales, with costs of $875,000. The tax rate is 30 percent and the required return on the project is 9 percent. What is the project

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.00 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 $2,180,000 in annual sales, with costs of $875,000. The tax rate is 30 percent and the required return on the project is 9 percent. What is the project

Explanation / Answer

Hi,

Please find the detailed answer as follows;

Initial Investment = -3000000

Annual Cash Inflow = (Sales - Costs - Depreciation)*(1Tax Rate) + Depreciation = (2180000 - 875000 - 3000000/3)*(1-30%) + 3000000/3 = 1213500

NPV = -3000000+1213500/(1+9%)^1+1213500/(1+9%)^2 +1213500/(1+9%)^3 = $71726.08

Thanks.

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