Keiper Inc. is considering a new three-year expansion project that requires an initial fixed asset investment (equipment) of $2.7 million. The fixed asset falls into the three year MACRS class. The fixed asset will have a market value of $210,000 at the end of the project. The project requires an initial investment in net working capital of $300,000 all of which will be recovered at the end of the project. The project is estimated to generate $2,080,000 in sales each year with costs of $775,000 annually. There are no fixed costs. The tax rate is 35 percent and the required return on the project is 12 percent.

MACRS 3-year property

Years Rate

1 33.33%

2 44.45%

3 14.81%

4 7.41%

A. What is the after tax salvage value of the equipment at the end of year 3?

B. Prepare a pro forma income statement for the project for each year.

C. Calculate the cash flow from assets.

Year 0 1 2 3

OCF

Net Capital Spending

Change in NWC

Cash flow from assets

D. Calculate the NPV of this project. Write down the equation you are solving. Based on the NPV should you accept or reject this project?