H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,340,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,740,000 in annual sales, with costs of $644,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $270,000 at the end of the project. |
Time line | 0 | 1 | 2 | 3 | |||
Cost of new machine | -2340000 | ||||||
Initial working capital | -310000 | ||||||
=Initial Investment outlay | -2650000 | ||||||
3 years MACR rate | 33.33% | 44.45% | 14.81% | 7.41% | |||
Sales | 1740000 | 1740000 | 1740000 | ||||
Profits | Sales-variable cost | 1096000 | 1096000 | 1096000 | |||
-Depreciation | =Cost of machine*MACR% | -779922 | -1040130 | -346554 | 173394 | =Salvage Value | |
=Pretax cash flows | 316078 | 55870 | 749446 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | 249701.62 | 44137.3 | 592062.34 | |||
+Depreciation | 779922 | 1040130 | 346554 | ||||
=after tax operating cash flow | 1029623.62 | 1084267.3 | 938616.34 | ||||
reversal of working capital | 310000 | ||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 213300 | |||||
+Tax shield on salvage book value | =Salvage value * tax rate | 36412.74 | |||||
=Terminal year after tax cash flows | 559712.74 | ||||||
a. Total Cash flow for the period | -2650000 | 1029623.62 | 1084267.3 | 1498329.08 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.1 | 1.21 | 1.331 | ||
Discounted CF= | Cashflow/discount factor | -2650000 | 936021.4727 | 896088.6777 | 1125716.814 | ||
b. NPV= | Sum of discounted CF= | 307826.96 |
H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset...
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