keiper inc is 2. Sales Costs Depreciation EBIT Taxes (34%) Net Income $682,900 4

Question

keiper inc is 2. Sales Costs Depreciation EBIT Taxes (34%) Net Income $682,900 437,800 110,400 Fill in the missing numbers and then calculate the OCF. Whatisthe depreciation tax shield? 2. Keiper, Inc., is considering a newthree-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 i annual sales, with costs of $775,000. The company's tax rate is 35 percent,its required return is 12% (after tax). What is the OCF for this project? What is the project's NPV? a) b) c) d) What is the project'sIRR? If Keiperis able to sell its fixed asset investments in this project at the end of three years for $270,000 how would it impact the project's NPV? Go back to the initial assumptions, but instead of straight-line depreciation the accounting department determines the initial investment qualifies for3-year MACRS. What is the operating cash flow of the project and what is its NPV? The depreciation schedule is shown below. e) ear 33.33% 44.45% 22.22% Depreciation %

Explanation / Answer

a) OCF = Net Income + Depreciation = 263,250 + 2,700,000 / 3 = 1,163,250

b) NPV = - 2,700,000 + 1,163,250 / (1 + 12%) + 1,163,250 / (1 + 12%)^2 + 1,163,250 / (1 + 12%)^3 = $93,930.22

c) IRR can be calculated using IRR function in excel or calculator. IRR = 14.01%

d) NPV will increase by an amount equal to 270,000 x (1 - 35%) / (1 + 12%)^3 = $124,917.43

NPV = 93,930.22 + 124,917.43 = $218,847.66

e) if MACRS depreciation is used,

Depreciation = MACRS % x Investment

Keiper 0 1 2 3 Investment -2,700,000 Sales 2,080,000 2,080,000 2,080,000 Costs -775,000 -775,000 -775,000 Depreciation -900,000 -900,000 -900,000 EBT 405,000 405,000 405,000 Tax (35%) -141,750 -141,750 -141,750 Net Income 263,250 263,250 263,250 Cash Flows -2,700,000 1,163,250 1,163,250 1,163,250 IRR 14.01% NPV $93,930.22

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