Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2652339 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.49 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 $2,010,000 in annual sales, with costs of $705,000. The project requires an initial investment in net working capital of $230,000, and the fixed asset will have a market value of $295,000 at the end of the project. If the tax rate is 34 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 16 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))
Years Cash Flow Year 0 $ Year 1 $ Year 2 $ Year 3 $Explanation / Answer
Project's Cash Flows in Year 0 = Purchase of fixed assets + Working capital investment = 2490000+230000 = -$2720000
Project's Cash Flows in Year 1:
Annual Sales = $2010000
Annual Costs = $705000
Depreciation = 2490000/3 = $830000
Tax = (2010000-705000-830000)*0.34 = $161500
Cash Flows = Annual Sales - Annual Costs - Tax = 2010000-705000-161500 = $1143500
Project Cash Flows in Year 2:
Cash Flows = Annual Sales- Annual Costs - Tax = 2010000-705000-161500 = $1143500
Project Cash flows in Year 3:
Sale Price of Fixed Asset = $295000
Tax on Sale = 295000*34% = $100300
Reversal of Working Capital = $230000
Cash FLows = Annual Sales- Annual Costs- Tax + Sale Price of FIxed Asset - Tax on Sale of fixed asset+ Reversal of Working Capital
Cash Flows = 2010000-705000-161500+295000-100300+230000 = $1568200
NPV of the project = Cash flow of year 0 + Cash flow of Year 1* PVF of Year 1 + Cash Flow of Year 2*PVF of Year 2 + Cash Flow of Year 3*PVF of Year 3
= -2720000+(1143500*0.862)+(1143500*0.743)+(1568200*0.641) = $120533.70
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