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 falls into the three-year MACRS class. 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 1 net cash flow? Year 2? Year 3? (Use MACRS)

Explanation / Answer

Year 1 2 3 Annual Sales a $2,080,000.00 $2,080,000.00 $2,080,000.00 Costs b $775,000.00 $775,000.00 $775,000.00 Depreciation Rate c 33.33% 44.85% 14.81% Depreciation (c*$2.7m) d $899,910.00 $1,210,950.00 $399,870.00 Earnings before Tax e = a-b-d $405,090.00 $94,050.00 $905,130.00 Taxes at 35% f $141,781.50 $32,917.50 $316,795.50 Earnings after Tax g = e - f $263,308.50 $61,132.50 $588,334.50 Depreciation h $899,910.00 $1,210,950.00 $399,870.00 Cashflow from operations i = g+h $1,163,218.50 $1,272,082.50 $988,204.50 Working Capital Realization j $0.00 $0.00 $300,000.00 Post tax salvage value of Machine k $0.00 $0.00 $202,744.50 Net Cashflows l = I + j + k $1,163,218.50 $1,272,082.50 $1,490,949.00 Purchase Cost of Machine $2,700,000.00 Less: Accumulated Depreciation $2,510,730.00 Book Value (a) $189,270.00 Market Value of Machine (b) $210,000.00 Profit on Sale on Machine (c = b-a) $20,730.00 Tax on Profit (d = c*35%) $7,255.50 Post Tax Salvage Value (b-d) $202,744.50

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