Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2651824 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 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 $2,110,000 in annual sales, with costs of $805,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $225,000 at the end of the project. If the tax rate is 35 percent, what is the project’s 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. Negative amounts should be indicated by a minus sign.)
If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 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 $2,110,000 in annual sales, with costs of $805,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $225,000 at the end of the project. If the tax rate is 35 percent, what is the project’s 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. Negative amounts should be indicated by a minus sign.)
Explanation / Answer
Savings in tax due to dep=2790000-225000/3 = 855000*35% = 299250
Calculation of NPV= Net Cash Flows(PVAF,12%, 3 years)
=1305000/(1.12)1+299250(1.12)1+1305000/(1.12)2+299250(1.12)2+1530000/(1.12)3+299250(1.12)3-2790000-330000
= 1604250*.892+1604250*.797+1829250*.711-2790000-330000
= 1430991+1278587+1300596-2790000-330000
= $ 890174
NPV is $ 890174
Cash Outflows Cash Inflows Net Year 0 2790000+330000= 3120000 3120000 Year 1 805000 2110000 1305000 Year 2 805000 2110000 1305000 Year 3 805000 2110000+225000= 2335000 1530000Related Questions
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