H. Cochran, Inc., is considering a new three-year expansion project that require
ID: 2780215 • Letter: H
Question
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,580,000. 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 $2,310,000 in annual sales, with costs of $1,330,000. Assume the tax rate is 30 percent and the required return on the project is 6 percent.
What is the project’s NPV? (A negative answer should be indicated by a minus sign. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Net present value $
Explanation / Answer
Net present value (56,676.72) Statement showing Cash flows Particulars Time PVf 6% Amount PV Cash Outflows - 1.00 (2,580,000.00) (2,580,000.00) PV of Cash outflows = PVCO (2,580,000.00) Cash inflows 1.00 0.9434 944,000.00 890,566.04 Cash inflows 2.00 0.8900 944,000.00 840,156.64 Cash inflows 3.00 0.8396 944,000.00 792,600.60 PV of Cash Inflows =PVCI 2,523,323.28 NPV= PVCI - PVCO (56,676.72) Annual Sales 2,310,000.00 Less Costs (1,330,000.00) Less depreciation = 2580,000/3 (860,000.00) Income 120,000.00 Less Tax at 30% 36,000.00 Income after Tax 84,000.00 Add Depreciation 860,000.00 Cash flows 944,000.00
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