H. Cochran, Inc., is considering a new three-year expansion project that require

Question

H. Cochran, 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, after which time it will be worthless. The project is estimated to generate $2,210,000 in annual sales, with costs of $1,200,000. Assume the tax rate is 35 percent and the required return on the project is 11 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

Annual depreciation=(2,280,000/3)=$760,000

Hence annual cash flows=(Sales-Costs)(1-tax rate)+(Tax savings on depreciation)

=(2,210,000-1,200,000)(1-0.35)+(0.35*760,000)=$922500

Hence Present value of inflows=$922500*Present value of annuity factor(11%,3)

=$922500*2.443714715

=$2254326.83(Approx)

NPV=Present value of inflows-Present value of outflows

=$2254326.83-$2,280,000

=-$25673.18(Approx)(Negative figure).

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