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 $2,490,000. 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 $2,280,000 in annual sales, with costs of $1,270,000. Assume the tax rate is 30 percent and the required return on the project is 8 percent.

What is the project

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,490,000. 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 $2,280,000 in annual sales, with costs of $1,270,000. Assume the tax rate is 30 percent and the required return on the project is 8 percent.

Explanation / Answer

EBITDA = 2280000 - 1270000 = $1,010,000

depriciation per year = 2490000/3 = 830000

operating cash flow per year

= (1010000 - 830000) * (1-0.3) + 830000

= 956000

NPV = -2490000 + 956000/1.08 + 956000/1.08^2 + 956000/1.08^3

= -$ 26,295.28

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