Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2708355 • 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
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
CF = Cash Flow...
CF0 = the original investment plus the increase in Net Working Capital (NWC) = 2.7m + 300k = 3,000,000
Annual Depreciation: 2,700,000 / 3 = 900,000
Annual CFs: [(sales - costs - depreciation)(1 - tax rate in decimal form)] + depreciation < depr. is added back b/c non-cash
(2,080,000 -775,000 - 900,000)(1 - 0.35) + 900,000 = 1163250
Additional 3rd year CFs:
sale of asset (assumed at market price) (note: since the asset is fully depreciated, the entire sales price is "profit"): price * (1 - tx) = 210,000 * 0.65 = 136500
Recapture the initial increase in NWC: 300,000
Total CF3: 1,163,250+ 136500 + 300,000 = $1599750
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