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 $2.1 million. 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 $2,150,000 in annual sales, with costs of $1,140,000.The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $175,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 14 percent. What are the net cash flows of the project for the following years?

Explanation / Answer

Sales $2150000 Less: Cost $1140000 Gross profit $1010000 Less: Depreciation ($2100000 / 3 years) $700000 Net income $310000 Less: Income tax (Net income * 0.35) $108500 Net income after tax $201500 Add: Depreciation $700000 Operating Cash Flow $901500 Depreciation is a non - cash expense, hence, added back in the computation of

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