Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2705823 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.67 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,070,000 in annual sales, with costs of $767,000. The project requires an initial investment in net working capital of $290,000, and the fixed asset will have a market value of $265,000 at the end of the project.
If the tax rate is 34 percent, what is the project Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.67 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,070,000 in annual sales, with costs of $767,000. The project requires an initial investment in net working capital of $290,000, and the fixed asset will have a market value of $265,000 at the end of the project.
Explanation / Answer
year 1 depriciation = 2670000 * 0.3333 = 889911
year 2 depriciation = 2670000 * 0.4445 = 1186815
year 3 depriciation = 2670000 * 0.1481 = 395427
book value in 3 years = 2670000 - 2472153 = 197847
after tax salvage value = 265000 + (197847 - 265000)*0.34 = 242167.98
year 0 cash flow = -2670000 - 290000 = -2960000
year 1 cash flow = 1303000 * 0.66 + 0.34 * 889911 = 1162549.74
year 2 cash flow = 1303000 * 0.66 + 0.34 * 1186815 = 1263497.10
year 3 cash flow = 1303000 * 0.66 + 0.34 * 395427 + 242167.98 + 290000 = 1526593.16
NPV = -2960000 + 1162549.74/1.13 + 1263497.10/1.13^2 + 1526593.16/1.13^3
= 116314.17
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