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 $2.64 million. 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 $2,330,000 in annual sales, with costs of $1,320,000. Assume the tax rate is 35 percent and the required return on the project is 6 percent.

What is the project

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 million. 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 $2,330,000 in annual sales, with costs of $1,320,000. Assume the tax rate is 35 percent and the required return on the project is 6 percent.

Explanation / Answer

CASH FLOWS :- ni $,millions?

=profit after tax + depreciation =? (2.33 - 1.32 - 0.88)* 0.65 + 0.88

= 0.9645 millions or $964,500 per year.

NPV:-

?$964,500*2.673 - $2,640,000? = ($61,891.50) (negative)

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