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 $2,220,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,190,000 in annual sales, with costs of $1,180,000. The project requires an initial investment in net working capital of $154,000, and the fixed asset will have a market value of S179,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 13 percent. Requirement 1: What are the net cash flows of the project for the following years? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).) Requirement 2: What is the NPV of the project? (Do not round 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).)

Explanation / Answer

Cochrane Inc, NPV & Cash Flow Assuming the annual cost   given does not include depreciation As nothing mentioned about return of Net working capital, not assuming   that NWC returned at the end of   project. Details Year 0 Year 1 Year 2 Year 3 Initial Fixed Asset investment      (2,220,000.0) NWC investment            (154,000.0) Annual Sales            2,190,000          2,190,000           2,190,000 Annual Cost       (1,180,000)        (1,180,000)         (1,180,000) Depreciation             (740,000)           (740,000)             (740,000) Salvage value           179,000.00 Taxable income       270,000.00        270,000.00         449,000.00 Tax @30%       (81,000.00)        (81,000.00)       (134,700.00) Post Tax Income       189,000.00        189,000.00         314,300.00 Add Back Depreciation       740,000.00        740,000.00         740,000.00 Net Cash Flow      (2,374,000.0)       929,000.00        929,000.00     1,054,300.00 PV factor @13%                         1.0                  0.885                  0.783                    0.693 PV of cash flows      (2,374,000.0)          822,123.9          727,543.3           730,682.8 NPV =   $      (93,650.05)

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