Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2706446 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.00 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 $2,180,000 in annual sales, with costs of $875,000. The tax rate is 30 percent and the required return on the project is 9 percent. What is the project
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.00 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 $2,180,000 in annual sales, with costs of $875,000. The tax rate is 30 percent and the required return on the project is 9 percent. What is the project
Explanation / Answer
Depreciation = 3,000,000/3 = 1,000,000
Cash flow in Year 0 = -$3,000,000
Cash flow in each Year = EBIT*(1-tax) + Depreciation = (2,180,000 -875,000-1,000,000)*(1-30%)+1,000,000=$1,213,500
NPV = 1,213,500PVIFA(9%,3) - 3,000,000 = $71,726.08
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