Question

H.Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,300,000. 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 $2,410,000 in annual sales, with costs of $1,430,000. Assume the tax rate is 23 percent and the required return on the project is 12 percent. What is the project's NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net present value

Answer 1

Step 1)Calculation of annual depreciation and annual cash flow :

Depreciation expense =[cost -residual value ]/useful life

                          = 2300000/3

                          = 766,666.67 per year

Annual cash flow :

sales	2410000
less:Cost	(1430000)
Depreciation	(766666.67)
Income before tax	213333.33
less:Tax expense (213333.33*23%)	(49066.67)
Net Income	164266.66
Add:Depreciation	766666.67
Annual cash flow	930933.33

Step 2)Calculation of present value of annual cash flow:

Present value =PVA12%,3* Annual cash flow

                  = 2.40183* 930933.33

                   = $ 2235943.60

Step 3)calculation of net present value:

Net present value =Present value -Initial cost

                        = 2235943.60 - 2300000

                         = - 64056.40

**Find present value annuity factor using the formula :[1/(1+i)^1 + 1/(1+i)^2 + 1/(1+i)^3 ] where i = 12%

or using present value annuity table .