Question

033 points Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset.costs of $775,000. The project requires an initial investment in net working into the three-year MACRS class. The project is estimated to generate $2,080,000 in annual sales, with c 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 intemediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) NPV $ References eBook & Resources

Answer 1

Answer:

Initial Investment = $2,700,000
Useful Life = 3 years

Depreciation Year 1 = 33.33% * $2,700,000
Depreciation Year 1 = $899,910

Depreciation Year 2 = 44.45% * $2,700,000
Depreciation Year 2 = $1,200,150

Depreciation Year 3 = 14.81% * $2,700,000
Depreciation Year 3 = $399,870

Book Value at the end of Year 3 = $2,700,000 - $899,910 - $1,200,150 - $399,870
Book Value at the end of Year 3 = $200,070

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $210,000 - ($210,000 - $200,070) * 0.35
After-tax Salvage Value = $206,524.50

Initial Investment in NWC = $300,000

Answer to Part 1.

Year 0:

Net Cash Flow = Initial Investment + Initial Investment in NWC
Net Cash Flow = -$2,700,000 - $300,000
Net Cash Flow = -$3,000,000

Year 1:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($2,080,000 - $775,000) * (1 - 0.35) + 0.35 * $899,910
Operating Cash Flow = $1,163,218.50

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $1,163,218.50

Year 2:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($2,080,000 - $775,000) * (1 - 0.35) + 0.35 * $1,200,150
Operating Cash Flow = $1,268,302.50

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $1,268,302.50

Year 3:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($2,080,000 - $775,000) * (1 - 0.35) + 0.35 * $399,870
Operating Cash Flow = $988,204.50

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = $988,204.50 + $300,000 + $206,524.50
Net Cash Flows = $1,494,729.00

Answer b.

Required Return = 12%

NPV = -$3,000,000 + $1,163,218.50/1.12 + $1,268,302.50/1.12^2 + $1,494,729.00/1.12^3
NPV = $113,589.50