H. Cochran, Inc., is considering a new three-year expansion project that require

Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,580,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,310,000 in annual sales, with costs of $1,300,000. The project requires an initial investment in net working capital of $166,000, and the fixed asset will have a market value of $191,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 7 percent. What is the net cash flow of the project each year?

Explanation / Answer

Calculate net Cash flow in each year :

Year Cash flow Net cash flow Year 0 (2580000+166000) (2746000) (2746000) Year 1 (2310000-1300000) 1010000 707000 Year 2 (2310000-1300000) 1010000 707000 Year 3 (2310000-1300000+191000) 1201000 898000

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