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 $2.91 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 $2,150,000 in annual sales, with costs of $845,000. The tax rate is 30 percent and the required return on the project is 11 percent. What is the project%u2019s NPV?

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.91 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 $2,150,000 in annual sales, with costs of $845,000. The tax rate is 30 percent and the required return on the project is 11 percent. What is the project%u2019s NPV?

Explanation / Answer

Hi,

Please find the answer as follows:

Depreciation = 2910000/3 = 970000

Annual Cash Inflows = 2150000 - 845000 %u2013 970000 = 335000*(1-.30) + 970000 = 1204500

NPV = - 2910000 + 1204500/(1+.11)^1 + 1204500/(1+.11)^2 + 1204500/(1+.11)^3 = 33454.37

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.