Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2763499 • 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’s year 0 net cash flow? Year 1? Year 2? Year 3? If the required return is 12 percent, what is the project's NPV?
Explanation / Answer
Profit=$2,080,000-$775,000-$900,000=$405,000
Tax on Profit=$405,000*.35=$141,750
PAT=$405,000-$141,750=$263,250
Cash flow=PAT+Depreciation=$263,250+$900,000=$1,163,250
Net Cash flow Year 0=-$2,700,000-$300,000=-$3,000,000
Year 1=$1,163,250
Year 2=$1,163,250
Year 3=$1,163,250+$300,000+$210,000*.65=$1,599,750
the project's NPV
Depreciation=$2,700,000/3=$900,000
Year Cash flow PV@13% PV 0 -3,000,000 1.0000 -3,000,000 1 1,163,250 0.8929 1,038,616 2 1,163,250 0.7972 927,336 3 1,599,750 0.7118 1,138,670 104,622Related Questions
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