Keiper, Inc., is considering a new three-year expansion project that requires an
ID: 2786139 • Letter: K
Question
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.67 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 $2,070,000 in annual sales, with costs of $765,000. The tax rate is 34 percent and the required return on the project is 13 percent. What is the project’s NPV? (Round your 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 $2.67 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 $2,070,000 in annual sales, with costs of $765,000. The tax rate is 34 percent and the required return on the project is 13 percent. What is the project’s NPV? (Round your answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Depreciation = 2,670,000 / 3 = 890,000
EBT = Sales - Cost - Depreciation = 415,000
Net Income = EBT x (1 - tax) = 273,900
Cash Flows = Investment + Net Income + Depreciation
NPV = NPV(rate = 13%, 1,163,900...1,163,900) - 2,670,000 = $78,145.51
Keiper 0 1 2 3 Investment -2,670,000 Sales 2,070,000 2,070,000 2,070,000 Costs -765,000 -765,000 -765,000 Depreciation -890,000 -890,000 -890,000 EBT 415,000 415,000 415,000 Tax (34%) -141,100 -141,100 -141,100 Net Income 273,900 273,900 273,900 Cash Flows -2,670,000 1,163,900 1,163,900 1,163,900 NPV $78,145.51Related Questions
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