Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2775233 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,140,000 in annual sales, with costs of $823,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $240,000 at the end of the project.
If the required return is 10 percent, what is the project's NPV? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,140,000 in annual sales, with costs of $823,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $240,000 at the end of the project.
Explanation / Answer
Following table contains details about the depreciation:
Year
1
2
3
MARS rate
33.33%
44.45%
14.81%
Depreciation Basis
$2,880,000.00
$2,880,000.00
$2,880,000.00
Depreciation
$959,904.00
$1,280,160.00
$426,528.00
Depreciation tax benefit
$335,966.40
$448,056.00
$149,284.80
Accumulated depreciation
$959,904.00
$2,240,064.00
$2,666,592.00
Book value of asset at the end of 3rd year = Cost of asset – accumulated depreciation
= 2,880,000-2,666,592
=213,408
Net salvage value = salvage value –tax on capital gain
=24,000 – (24,000-213408)*.35
= 230,692.80
Cash flow table
Year
0
1
2
3
Cost of asset
-$2,880,000.00
Sales
$2,140,000.00
$2,140,000.00
$2,140,000.00
(-) cost of sales
-$823,000.00
-$823,000.00
-$823,000.00
EBIT
$1,317,000.00
$1,317,000.00
$1,317,000.00
(-) tax 35%
-$460,950.00
-$460,950.00
-$460,950.00
Net Income
$856,050.00
$856,050.00
$856,050.00
Depreciation tax benefit
$335,966.40
$448,056.00
$149,284.80
Net Salvage value
$230,692.80
Working capital
-$360,000.00
$360,000.00
Cash flows
-$3,240,000.00
$1,192,016.40
$1,304,106.00
$1,596,027.60
To calculate NPV, we need to discount all the cash flows at the given discount rate and add those discounted values:
year
Cash flow
PV factor 10%
PV
0
-$3,240,000.00
1.000
-$3,240,000.000
1
$1,192,016.40
0.909
$1,083,651.273
2
$1,304,106.00
0.826
$1,077,773.554
3
$1,596,027.60
0.751
$1,199,119.159
NPV
$120,543.985
Hence, NPV of the project is $120,543.99
Year
1
2
3
MARS rate
33.33%
44.45%
14.81%
Depreciation Basis
$2,880,000.00
$2,880,000.00
$2,880,000.00
Depreciation
$959,904.00
$1,280,160.00
$426,528.00
Depreciation tax benefit
$335,966.40
$448,056.00
$149,284.80
Accumulated depreciation
$959,904.00
$2,240,064.00
$2,666,592.00
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