Question

1.

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? (Negative amounts should be indicated by a minus sign.)

  

Years	Cash Flow
Year 0	$
Year 1	$
Year 2	$
Year 3	$

If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

NPV

$

2.

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)  (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

Years	Cash Flow
Year 0	$
Year 1	$
Year 2	$
Year 3	$

If the required return is 12 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))

NPV

$

Answer 1

Year 0 Cash flow is -$2,400,000

Year 1 Cash Flow is $1,163,250

Year 2 Cash Flow is $1,163,250

Year 3 Cash Flow is $1,599,750

NPV of the Project is $704,622.30

Calculation of NPV of the Project
Particulars	0	1	2	3
Initial Investment
Fixed Assets Investment	-2700000
Investment in net working capital	300000
Net Investment (A)	-2400000
Operating Cash Flows
Annual Saels (B)		2080000	2080000	2080000
Annual Costs (C )		775000	775000	775000
Depreciation (D) $2,700,000 / 3 years		900000	900000	900000
Profit Before Tax (E = B-C-D)		405000	405000	405000
Tax @35% (F = E*35%)		141750	141750	141750
Profit After Tax (G = E-F)		263250	263250	263250
Add back Depreciation (H = D)		900000	900000	900000
Net Operating Cash Flows (I = G+H)		1163250	1163250	1163250
Terminal Value
Sale Value (J)				210000
Tax @35% (K = J*35%)				73500
After tax sale value (L = J-K)				136500
Recovery of net working capital (M)				300000
Net Terminal Value (N = L+M)				436500
Total Cash Flows (O= A+I+N)	-2400000	1163250	1163250	1599750
Discount Factor @12% (P ) 1/(1+12%)^n n=0,1,2,3	1	0.892857143	0.797193878	0.711780248
Discounted Cash Flows (Q = O*P)	-2400000	1038616.071	927335.7781	1138670.451
NPV of the Project	704622.3009