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 $2.13 million. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,160,000 in annual sales, with costs of $1,150,000. The project requires an initial investment in net working capital of $151,000, and the fixed asset will have a market value of $176,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 14 percent. Requirement 1: What is the net cash flow of the project for the following years? (Do not include the dollar signs ($). Negative amounts should be indicated by a minus sign. Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).Round your answers to 2decimal places (e.g., 32.16).) Year Cash Flow 0 $ 1 2 3 -------------------------------------------------------------------------------- Requirement 2: What is the NPV of the project? (Do not include the dollar sign ($).Enter rounded answer as directed, but do not use the rounded numbers in 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 $

Explanation / Answer

Depreciation:
Y1 = 33.33% * 2,130,000 = 709,929
Y2 = 44.45% * 2,130,000 = 946,785
Y3 = 14.81% * 2,130,000 = 315,453

BTCF = 2,160,000 - 1,150,000 = 1,010,000

Cash Flows:
Y1 = - 2,130,000 + 151,000 = -2,281,000.00
Y1 = 1,010,000 - (1,010,000 - 709,929)*30% = 919,978.70
Y2 = 1,010,000 - (1,010,000 - 946,785)*30% = 991,035.50
Y3 = (1,010,000+176,000) - (1,010,000+176,000-315,453)*30% = 924,835.90

NPV = -2,281,000.00 + 919,978.70/(1+14%)1 + 991,035.50/(1+14%)2 + 924,835.90/(1+14%)3
NPV = -2,281,000.00 + 806,998.86 + 762,569.64 + 624,237.89
NPV = -87,193.61

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