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. 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.

Requirement 1: What are the net cash flows of the project for the following years?

Requirement 2: What is the NPV of the project?

Explanation / Answer

inital investment = 1680000 + 150000 = 18300000

depriciation per year = 1680000/3 = 560000

cash flow per year = (1950000 - 1060000 - 560000) * (1-0.34) + 560000

= 777800

terminal cash flow = 175000 * (1-0.34) = 115500

NPV = -18300000 + 777800/1.14 + 777800/1.14^2 + 777800/1.14^3 + 115500/1.14^3

= 53724.60

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