Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2698443 • Letter: C
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 falls into the three-year MACRS class (MACRS Table). 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 $175,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 14 percent.
What is the net cash flow of the project for the following years? (Do not include the dollar signs ($). 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 2 decimal places (e.g., 32.16).)
What is the NPV of the project? (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Requirement 1:What is the net cash flow of the project for the following years? (Do not include the dollar signs ($). 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 2 decimal places (e.g., 32.16).)
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 operating cash flow.
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