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 $1,680,000. 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.

Required:

1)If the tax rate is 34 percent, what is the OCF for this project?

2) What is the projects NPV

3) 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 34 percent and the required return on the project is 14 percent.

What are the net cash flows of the project for the following years? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).)

What are the net cash flows of the project for the following years? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).)

Explanation / Answer

1680,000 / 3 = 560000 depreciation per year

1950000 – 1060000 – 560000 = EBIT 330000 – Taxes 112200 = Net Income 217800

OCF = 330000 + 560000 – 112200 = 777800

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