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 $2.61 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 $2,320,000 in annual sales, with costs of $1,300,000. The project requires an initial investment in net working capital of $167,000, and the fixed asset will have a market value of $192,000 at the end of the project. Assume that the tax rate is 40 percent and the required return on the project is 6 percent.

What are the net cash flows of the project for the following years? (Do not include the dollar signs ($). Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).)

What is the NPV of the project? (Do not include the dollar sign ($). 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).)

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 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 $2,320,000 in annual sales, with costs of $1,300,000. The project requires an initial investment in net working capital of $167,000, and the fixed asset will have a market value of $192,000 at the end of the project. Assume that the tax rate is 40 percent and the required return on the project is 6 percent.

Explanation / Answer

Below are the Solutions and the Working -

Assumption -

1) Sales and Cost effective in Cash only

2) Working Capital Initially Invested recovered in Last year

3) Asset Depreciated fully in three years to show more expenses for tax saving in initial years

Requirement 1) Below is the Net cash flows statement of the project

Requirement 2) The NPV of the project is calculated below using the above information and PV table -

Working Note - 1

Working Note - 2 - Depreciation at straight-line to zero

So Depreciation Every Year = Cost of Asset / Number of years

2610000 / 3 = $870000

Working Note 3 -

Working Note 4 -

Year Cash Flow Comment 0 -2777000 Note 1 - Outflow 1 960000 Note 3 2 960000 Note 3 3 1242200 Note 4 Total Cash Flow $385200

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