Cochrane Inc., is considering a new three-year expansion project that requires a

Question

Cochrane

Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. 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 $1,950,000 in annual sales, with costs of $1,060,000. Assume the tax rate is 35 percent and the required return on the project is 14 percent.

What is the project

Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. 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 $1,950,000 in annual sales, with costs of $1,060,000. Assume the tax rate is 35 percent and the required return on the project is 14 percent.

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Investment = -1860000

Annual Cash Inflows = (Sales- Costs - Depreciation)*(1-Tax Rate) + Depreciation = (1950000 - 1060000 - 1860000/3)*(1-.35) + 1860000/3 = 795500

NPV = -1860000 + 795500/(1+.14)^1 + 795500/(1+.14)^2 + 795500/(1+.14)^3 = -13141.72

Answer is -13141.72

Thanks.

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