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 $2,460,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,270,000 in annual sales, with costs of $1,260,000. The project requires an initial investment in net working capital of $162,000, and the fixed asset will have a market value of $187,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 8 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 intermediate calculations. 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 $2,460,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,270,000 in annual sales, with costs of $1,260,000. The project requires an initial investment in net working capital of $162,000, and the fixed asset will have a market value of $187,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 8 percent.

Explanation / Answer

Requirement 1: 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).)

Cash Flow :

Year 0 = -initial fixed asset investment - initial investment in net working capital

Year 0 = - 2460000 - 162000

Year 0 = - $ 2,622,000

Annual Depreciation = 2460000/3 = 820000

After tax salvage Value = 187000*(1-35%) = $ 121,550

Year 1 = (Annual Sale - Annual Cost) *(1-tax rate) + Annual Depreciation*tax rate

Year 1 = (2270000 - 1260000)*(1-35%) + 820000*35%

Year 1 = $ 943500

Year 2 = (Annual Sale - Annual Cost) *(1-tax rate) + Annual Depreciation*tax rate

Year 2 = (2270000 - 1260000)*(1-35%) + 820000*35%

Year 2= $ 943500

Year 3 = (Annual Sale - Annual Cost) *(1-tax rate) + Annual Depreciation*tax rate + Post tax salvage Value + Working capital realised

Year 3 = (2270000 - 1260000)*(1-35%) + 820000*35% + 121550 + 162000

Year 3= $ 1,227,050

Answer

Requirement 2: What is the NPV of the project? (Do not round intermediate calculations. 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).)

NPV = -2622000 + 943500/1.08 + 943500/1.08^2 + 1227050/1.08^3

NPV = $ 34,582.14

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