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 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

$

Answer 1

Year zero cash outflow = Initial investment + Net working capital

Year zero cash outflow = -2700000 + -300000

Cash outflow at year 0 = -3000000

Cash flow at year 1 = ( Sales - costs - depriciation)( 1 - tax) + D

Cash flow at year 1 = ( 2080000 - 775000 - 900000)( 1 - 0.35) + 900000

After tax operating Cash flow at year 1 = 1163250

Cash flow at year 2 =  ( Sales - costs - depriciation)( 1 - tax) + D

Cash flow at year 2 = ( 2080000 - 775000 - 900000)( 1 - 0.35) + 900000

After tax operating Cash flow at year 2 = 1163250

Cash flow at year 3 =  ( Sales - costs - depriciation)( 1 - tax) + D

Cash flow at year 3 = ( 2080000 - 775000 - 900000)( 1 - 0.35) + 900000

After tax operating Cash flow at year 3 = 1163250

Terminal year cash flow = Cash proceeds from sale of fixed assets + Net wroking capital - tax( sales - book value)

Terminal year cash flow = 210000 + 300000 - 0.35(210000 - 0)

Terminal year after tax non-operating cash flow = 436500

Total cash flow for year 3 = 1599750

2)

Discount rate = 12%

NPV = -3000000 + (1163250 / 1.12) + (1163250 / 1.12²⁾ + (1599750 / 1.12³)

NPV = $104,622.30