Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2707136 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 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 $2,080,000 in annual sales, with costs of $775,000. The project requires an initial investment in net working capital of $300,000, and the fixed asset will have a market value of $210,000 at the end of the project. If the tax rate is 35 percent, what is the project
Explanation / Answer
YEARS
CASHFLOW
PV@12%
0
-(2700000+300000) = -3000000
- 3000000
1
(2080000-775000-830000)(0.65) +830000= 1138750
1016741
2
(2080000-775000-830000)(0.65) +830000= 1138750
907805
3
(2080000-775000-830000)(0.65) +830000= 1138750
ADD:-SALE VALUE OF MACHINE = 210000
ADD:- RECOVERY OF WORKING CAPITAL =300000
TOTAL CF3 = 1648750
1173548
NPV =
98094
NOTE:- DEPRECIATION PER YEAR =(2700000-210000)/3 = 830000
YEARS
CASHFLOW
PV@12%
0
-(2700000+300000) = -3000000
- 3000000
1
(2080000-775000-830000)(0.65) +830000= 1138750
1016741
2
(2080000-775000-830000)(0.65) +830000= 1138750
907805
3
(2080000-775000-830000)(0.65) +830000= 1138750
ADD:-SALE VALUE OF MACHINE = 210000
ADD:- RECOVERY OF WORKING CAPITAL =300000
TOTAL CF3 = 1648750
1173548
NPV =
98094
NOTE:- DEPRECIATION PER YEAR =(2700000-210000)/3 = 830000
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