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 $2,280,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,210,000 in annual sales, with costs of $1,200,000. The project requires an initial investment in net working capital of $156,000, and the fixed asset will have a market value of $181,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 11 percent. What are the net cash flows of the project for Year 0 Year 1 Year 2 and Year 3? What is the NPV of thi project?

Explanation / Answer

Year Sales Costs Income Tax@35% Cash flows Discount@11% PVCF

1 2210000 1200000 1010000 353500 656500 0.9009 591440.85

2 2210000 1200000 1010000 353500 656500 0.8116 532815.4

3 2210000 1200000 1010000 353500 656500 0.7312 480032.8

Total PV cash flows 1604289.05

initial investment (2280000)

initial working capital (156000)

NPV (831710.95).

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