Cochrane, Inc., is considering a new three-year expansion project that requires

Question

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $1,950,000 in annual sales, with costs of $1,060,000. The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $175,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 14 percent.

What is the net cash flow of the project for the following years? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567). Round your answers to 2 decimal places (e.g., 32.16).)

What is the NPV of the project? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).Round your answer to 2 decimal places (e.g., 32.16).)

  NPV

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $1,950,000 in annual sales, with costs of $1,060,000. The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $175,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 14 percent.

Explanation / Answer

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What is the net cash flow of the project for the following years?

Net Cash flow = (Annual cash flow - cost- depreciation )*(1-35%) + depreciation

Salvage value = 1860000- -1860000*(33.33%+44.45%+14.81%)=137826.00

Cash flow from Sale of assets = $175,000- ($175,000-137826.00)*35%=$161989.10

Requirement 2:

NPV = (2,010,000.00) + 795,478.30/1.14 + 867,869.50/1.14^2 + 986,902.20/1.14^3=$21,716.26

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