Keiper, Inc.

, is considering a new three-year expansion project that requires an initial fixed

asset investment of $2.67 million. The fixed asset falls into the three-year MACRS class. The
project is estimated to generate $2,070,000 in annual sales, with costs of $767,000. The
project requires an initial investment in net working capital of $290,000, and the fixed asset
will have a market value of $265,000 at the end of the project.
If the tax rate is 34 percent, what is the projects 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 $
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If the required return is 13 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 $
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Solution:
Year 1 Depreciation = $2,670,000 (0.3330) = $889,110
Year 2 Depreciation = $2,670,000 (0.4440) = $1,185,480
Year 3 Depreciation = $2,670,000 (0.1480) = $395,160
Book value in 3 years = $2,670,000 ($889,110 + $1,185,480 + $395,160)
= $200,250
After-tax salvage value = $200,250 + (265,000 - $200,250) (0.34) = $222,265
OCF = (Sales costs) (1 t) + t*Dep
Year 0 = -$2,670,000 - $290,000 = -$2,960,000

Year 1 = ($2,070,000 - $767,000) (1 0.34) + 0.34*889,110 = $1,162,277.40

Year 2 = ($2,070,000 - $767,000) (1 0.34) + 0.34*1,185,480 = $1,263,043.20
Year 2 = ($2,070,000 - $767,000) (1 0.34) + 0.34*395,160 + $222,265 + $290,000 =
$1,506,599.4
NPV = -$2,960,000 + $1,162,277.40/1.13 + $1,263,043.20/1.13 2 + $1,506,599.4/1.133 =
$101,861.12
Compact fluorescent lamps (CFLs) have become more popular in recent years, but do they
make financial sense? Suppose a typical 60-watt incandescent lightbulb costs $0.53 and
lasts for 1,000 hours. A 15-watt CFL, which provides the same light, costs $3.80 and lasts
for 12,000 hours. A kilowatt hour of electricity costs $0.129, which is about the national
average. A kilowatt-hour is 1,000 watts for 1 hour. However, electricity costs actually vary
quite a bit depending on location and user type. An industrial user in West Virginia might
pay $0.04 per kilowatt-hour whereas a residential user in Hawaii might pay $0.25.
You require a return of 9 percent and use a light fixture 500 hours per year. What is the
break-even cost per kilowatt-hour? (Do not round intermediate calculations and round your
final answer to 6 decimal places. (e.g., 32.161616))
Break-even cost ?
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Solution:
Number of watts used by the bulb per hour = W/1000
Kilowatt hours used per year = W/1000 x H
Electricity cost per year = W/1000 x H x C
NPV = -P (W/1000 x H x C) (PVIFA @ 9%, n)
EAC of 1st bulb = [-$0.53 (60/ 1000 x 500 x C) (PVIFA @ 9%, 2)]/PVIFA @ 9%, 2
= [-$0.53 52.7733C]/1.7591
EAC of 2nd bulb = [-$3.80 (15/1000 x 500 x C) (PVIFA @ 9%, 24)]/PVIFA @ 9%, 24
= [-$3.80 72.7996C]/9.7066
[-$0.53 52.7733C]/1.7591 = [-$3.80 72.7996C]/9.7066
5.5179[-$0.53 52.7733C] = [-$3.80 72.7996C]

-$2.9245 291.20C = -$3.80 72.7996C

-218.4004C = -0.8755
C = $0.004009

Your company has been approached to bid on a contract to sell 3,500 voice recognition (VR)
computer keyboards a year for four years. Due to technological improvements, beyond that
time they will be outdated and no sales will be possible. The equipment necessary for the
production will cost $3.1 million and will be depreciated on a straight-line basis to a zero
salvage value. Production will require an investment in net working capital of $88,000 to be
returned at the end of the project, and the equipment can be sold for $268,000 at the end
of production. Fixed costs are $633,000 per year, and variable costs are $148 per unit. In
addition to the contract, you feel your company can sell 8,800, 9,700, 11,800, and 9,100
additional units to companies in other countries over the next four years, respectively, at a
price of $275. This price is fixed. The tax rate is 35 percent, and the required return is 9
percent. Additionally, the president of the company will undertake the project only if it has
an NPV of $100,000. What bid price should you set for the contract? (Do not round
intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Bid price $

Solution:
Year

Sales

$2,420,000

$2,667,500

$3,245,000

$2,502,500

Variable costs

$1,302,400

$1,435,600

$1,746,400

$1,346,800

EBT

$1,117,600

$1,231,900

$1,498,600

$1,155,700

Tax

$391,160

$431,165

$524,510

$404,495

OCF

$726,440

$800,735

$974,090

$751,205

NPV of OCF = $726,440/1.09 + $800,735/1.09^2 + $974,090/1.09^3 +$751,205/1.09^4

= $2,624,770.11
After-tax salvage value = $268,000*(1 0.35) = $174,200

NPV = $100,000 = -$3,100,000 - $88,000 + $2,624,770.11 + OCF (PVIFA @ 9%, 4) +

[(174,200 + 88,000)/1.094]
$100,000 = -$3,100,000 - $88,000 + $2,624,770.11 + OCF (PVIFA @ 9%, 4) + [(174,200
+ 88,000)/1.094]

$100,000 = -$377,480.80 + OCF (3.2397)

OCF = 477,480.80/3.2397
OCF = 147,384.26
OCF = $147,384.26 = [(P v) Q FC] (1 tC) + tCD
147,384.26 = [(P 148) (3500) $633,000] (1 0.35) + 0.35($3,100,000/4)
147,384.26 = [3500P 518,000 633,000] (0.65) + 271,250
147,384.26 = 2275P 336,700 411,450 + 271,250
147,384.26 = 2275P 336,700 411,450 + 271,250
2275P = 624,284.26
P = $274.41