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 $2,310,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,220,000 in annual sales, with costs of $1,210,000. The project requires an initial investment in net working capital of $157,000, and the fixed asset will have a market value of $182,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 11 percent.

What are the net cash flows of the project for the following years? (Do not round intermediate calculations. A negative amount 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 round)

What are the net cash flows of the project for the following years? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).)

Explanation / Answer

Year 0 1 2 3 Initial cost -2310000 Sales 2220000 2220000 2220000 Cost 1210000 1210000 1210000 Depreciation 770000 770000 770000 PBT(Sales-Cost-Dep) 240000 240000 240000 PAT=PBT(1-Tax) 168000 168000 168000 Operating Cash Flow(PAT+Dep) 938000 938000 938000 NWC -157000 157000 Salvage value 182000 Net Cash flow -2310000 781000 938000 1277000 P.V@11% -2310000 703603.6 761301.8 933731.4 NPV 88636.8399

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