Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,710,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $3,370,000 in annual sales, with costs of $2,190,000. The project requires an initial investment in net working capital of $190,000 and the fixed asset will have a market value of $225,000 at the end of the project. Assume that the tax rate is 24 percent and the required return on the project is 12 percent. a. What are the net cash flows of the project each year? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

052 x r for --K51/3 D N A B C Depreciatio 50 Year Revenue Costs n 51 0 52. 1 $ 3.370.000 $ 2,190,000 $ 903,333 $ 53 2 $3,370,000 $ 2,190,000 $ 903,333 $ 3 $3,370,000 $ 2,190,000 $ 903,333 $ 55 E F G H I J K L M After-tax Working PVIF@ PBT Tax@24% Net income Depreciation OCF capital Investment Net cash flow 12% $(190,000) $(2,710,000) $ (2,900,000)| 1.000 $ 276,667 $ 66,400 $ 210,267 $ 903,333 $ 1,113,600 $ . $ 1,113,600 0.893 $ 276,667 $ 66,400 $ 210,267 $ 903,333 $ 1,113,600 $ - $ 1,113,600 0.797 $ 276,667 $ 66,400 $ 210,267$ 903,333 $ 1,113,600 $ 190,000 $ 171,000 $ 1,474,600 0.712 $ Present value (2,900,000.00) 994,285.71 887,755.10 1,049,591.15 54 Net present value ,631.97 $ 2,710,000 $ 2,710,000 66 $ $ $ $ 225,000 225,000 54,000 171,000 68 Asset cost Less: Depreciation charged WDV at the time of sale Sale value of machine Profit/(Loss) on sale 67 Less: Tax @ 24% After tax cash salvage value 69 70 Net cash flow Year o 71 Net cash flow Year 1 72 Net cash flow Year 2 73 Net cash flow Year 3 74 NPV -$2,900,000 $1,113,600 $1,113,600 $1,474,600 $31,631.97

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