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 $2.88 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 $2,140,000 in annual sales, with costs of $835,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $240,000 at the end of the project. If the tax rate is 35 percent, what is the project

Explanation / Answer

Year Investment Revenue Costs Depreciation (2.88 million / 3) Net income (Revenue - Costs - Dep) Tax (Net income * 35%) Net Cashflow (Net income - Tax + Depreciation) 0 $ (3,240,000.00) $                       -   $                      -   $                           -   $                         -   $                     -   $        (3,240,000.00) 1 $                         -   $ 2,140,000.00 $ (835,000.00) $       (960,000.00) $       345,000.00 $ (120,750.00) $          1,184,250.00 2 $                         -   $ 2,140,000.00 $ (835,000.00) $       (960,000.00) $       345,000.00 $ (120,750.00) $          1,184,250.00 3 $       240,000.00 $ 2,140,000.00 $ (835,000.00) $       (960,000.00) $       345,000.00 $ (120,750.00) $          1,340,250.00 Year Net Cashflow PV Factor Present Value 0 -3240000 1 -3240000 1 1184250 0.909090909 1076590.909 2 1184250 0.826446281 978719.0083 3 1340250 0.751314801 1006949.662 Net Present Value -177740.4207 Notes: 1. Assumed that the tax rate for sales of assets is the same i.e. 35% 2. Assumed that the initial working capital investment is not received at the end of the project as no further information is provided

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