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 $2,310,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,220,000 in annual sales, with costs of $1,210,000. The project requires an initial investment in net working capital of $157,000, and the fixed asset will have a market value of $182,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 11 percent.

What is the net cash flow of the project for the following years?

Year 0 ____?
Year 1_____?
Year 2 ____?
Year 3_____?

What is the NPV of the project?

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,310,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,220,000 in annual sales, with costs of $1,210,000. The project requires an initial investment in net working capital of $157,000, and the fixed asset will have a market value of $182,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 11 percent.

Explanation / Answer

Cash Flows during the Year Year 0 Year 1 Cash Outflows -2310000 -2310000 -2310000 1 -2310000 Annual Sales 222000 222000 0.900901 200000 Costs -121000 -121000 0.900901 -109009 0 Net working Capital -157000 -157000 -157000 1 -157000 0 Salvage Value 182000 0 Year 0 Cash Flows = - 2467000 Year 1 Sales- Cost 101000 Dep = 2310000-157000 178671.9 Depreciation 178671

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