Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2652378 • 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
Depreciation = 2490000-295000/3 = 7316667
TAx Saving due to depreciation = 7316667*34%=248767
Net Income= Revenue- Costs
=2010000-705000
= 1305000
After Tax= 1305000(1-.34) = $861300
Year 0 Cash Flow = -2490000-230000 = $- 2720000
Year 1= 861300+248767 = $ 1110067
Year 2 = 1110067
Year 3 = 1110067+295000*66% = 1110067+194700 = $ 1304767
NPV= 1110067/(1+.16)1+(1110067)/(1+.16)2+(1304767)/(1+.16)3-2720000
= 1110067*.862+1110067*.743+1304767*.640-2720000
= 956878+824780+835050-2720000
NPV =- $ 103292
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.