Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2705929 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.97 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 $2,170,000 in annual sales, with costs of $865,000. The project requires an initial investment in net working capital of $390,000, and the fixed asset will have a market value of $255,000 at the end of the project. If the tax rate is 35 percent, what is the project
Explanation / Answer
The NPV of the project is $93,405.27.
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Year 0 1 2 3 Revenue $ - $ 2,170,000 $ 2,170,000 $ 2,170,000 Depreciation $ - $ (990,000) $ (990,000) $ (990,000) Other Costs $ - $ (865,000) $ (865,000) $ (865,000) NOPAT $ - $ 204,750 $ 204,750 $ 204,750 Add Depreciation $ - $ 990,000 $ 990,000 $ 990,000 Cash Flow from Operations $ - $ 1,194,750 $ 1,194,750 $ 1,194,750 Cost of Asset $ (2,970,000) Installation $ - Net Working Capital $ (390,000) $ 390,000 Sale of Equipment $ 255,000 Book Value of Equipment $ - Profit from Sale $ 255,000 Tax on Sale $ (89,250) Total Cash Flow $ (3,360,000) $ 1,194,750 $ 1,194,750 $ 1,750,500
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