Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2650608 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,670,000. 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 $2,340,000 in annual sales, with costs of $1,330,000. Assume the tax rate is 30 percent and the required return on the project is 6 percent.
What is the project’s NPV? (Do not round intermediate calculations. Negative amount should be indicated by a minus 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 $2,670,000. 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 $2,340,000 in annual sales, with costs of $1,330,000. Assume the tax rate is 30 percent and the required return on the project is 6 percent.
Explanation / Answer
Investment in Fixed assets $ 2,670,000.00 Solvage value 0 Cash outflows $ 2,670,000.00 Annual Depreciation over 3 year life $ 890,000.00 Annual Sales $ 2,340,000.00 Less Cost $ 1,330,000.00 $ 1,010,000.00 Less Depreciation $ 890,000.00 Profit $ 120,000.00 Tax @ 30% $ 36,000.00 Income after Tax $ 84,000.00 Add back Depreciation $ 890,000.00 Annual Cash Inflows $ 974,000.00 at 6 % Present Year PV Factor Cash Flows Value 0 1.00000 (2,670,000.00) (2,670,000.00) 1 0.94340 974,000.00 918,867.92 2 0.89000 974,000.00 866,856.53 3 0.83962 974,000.00 817,789.18 Total 252,000.00 (66,486.36) Net Present Value = $66486.36
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