1) Cochrane, Inc., is considering a new three-year expansion project that requir
ID: 2625897 • Letter: 1
Question
1) Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,370,000. 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 $2,240,000 in annual sales, with costs of $1,230,000.
If the tax rate is 35 percent, what is the OCF for this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
2) Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,250,000. 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 $2,200,000 in annual sales, with costs of $1,190,000. Assume the tax rate is 40 percent and the required return on the project is 11 percent.
What is the project
Required:If the tax rate is 35 percent, what is the OCF for this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Explanation / Answer
OCF = (Sales - Cost)(1 - tax rate) + (tax rate x Depreciation)
OCF = (2240000 - 1230000)*(1-0.35) + (0.35 X (2370000/3)
OCF = 656500 + 276500
OCF = $ 933000
2) OCF = (Sales - Cost)(1 - tax rate) + (tax rate x Depreciation)
OCF = (2200000 - 1190000)*(1-0.40) + (0.40 X (2250000/3)
OCF = 606000 + 300000
OCF = $ 906000
NPV = OCF x [1 - 1 / (1+r)^t / r] - initial investment
NPV = - $35994.47
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