Question

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.91 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 $2,150,000 in annual sales, with costs of $845,000. The tax rate is 30 percent and the required return on the project is 11 percent. What is the project’s NPV? (Round your answer to 2 decimal places. (e.g., 32.16))

NPV

$

Answer 1

Annual depreciation=$2.91million/3

=$970,000

Hence annual operating cash flows=(Sales-Costs)(1-tax rate)+Tax savings on Depreciation

=(2,150,000-845000)(1-0.3)+(0.3*970000)

=$1204500

Present value of inflows=cash inflow*Present value of annuity(rate%,time period)

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$1204500[1-(1.11)^-3]/0.11

=$1204500*2.443714715

=$2943454.375

NPV=Present value of inflows-Present value of outflows

=$2943454.375-$2,910,000

which is equal to

=$33454.38(Approx).