Keiper, Inc., is considering a new three-year expansion project that requires an

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’s year 0 net cash flow? Year 1? Year 2? Year 3?

Explanation / Answer

Project's Yearly Cash Flows:

Year 0 -2700000-300000 -3000000 Year 1 2080000-775000 1305000 Year 2 2080000-775000 1305000 Year 3 2080000-775000+210000+300000    1815000

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