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 $2,130,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,160,000 in annual sales, with costs of $1,150,000. The project requires an initial investment in net working capital of $151,000, and the fixed asset will have a market value of $176,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 14 percent. Requirement 1: What is the net cash flow of the project for the following years?

Explanation / Answer

1 Year cash flow =

sales= $2,160,000-$ 1150,000(costs)= $ 1010,000-709929(dep @ 33.33%)=300,071- 90,021.30(tax 30%)=

210,049.70+709929.00(dep)=919978.70-151000(NWC) =768,978.70

2 year cash flow=

sales=2160,000-1150,000(costs)=1010,000-631,221.56(dep)=478,778.44- 143,633.53(TAX 30%)=

325,144.91+631221.56(DEp)=956,366.47

3 year cash flow =

sales =2160,000-1150,000(costs)=1010,000-116,724.93(dep )=893,275.07 -267,982.52(tax)=

625,292.55+116,724.93(dep)=742,017.48+151000(NWC)=893,017.48+176000(SV)=1069,017.48

so the net cash flows for 3 years are year 1 $ 768,978.70

2 $ 956,366.47

3 $ 1069,017.48

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