Question

H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,310,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,725,000 in annual sales, with costs of $632,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $225,000 at the end of the project. a. If the tax rate is 23 percent, what is the project's Year O net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to two decimal places, e.g., 32.16.) b. If the required return is 11 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16.) Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow NPV

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Answer 1

D52 N - X Fax =2310000*0.3333 A B C D E F G H I J K L M Depreciatio Net After-tax Working PVIF@ 50 Year Revenue Costs in PBT Tax@23% income Depreciation OCF capital Investment Net cash flow 11% | 51 0 $ (280,000) $ (2,310,000) $ (2,590,000)| 1.000 52 1 $ 1,725,000 $ 632,000 $ 769,923 $ 323,077 $ 74,308 $ 248,769 $ 769,923 $ 1,018,692 $ $ 1,018,692 0.901 2 $1,725,000 $ 632,000 $1,026,795 $ 66,205 $ 15,227 $ 50,978 $ 1,026,795 $ 1,077,773 $ $ 1,077,773 0.812 54 3 $ 1,725,000 $ 632,000 $ 342,111 $ 750,889 $ 172,704 $ 578,185 $ 342,111 $ 920,296 $ 280,000 $ 212,619 $ 1,412,915 0.731 Present value -$2,590,000.00 $917,740.80 $874,744.62 $1,033,111.17 Net present value $235,596.59 Asset cost Less: Depreciation charged WDV at the time of sale Sale value of machine Profit/(Loss) on sale Less: Tax @ 23% After tax cash salvage value $ 2,310,000 $ 2,138,829 $ 171,171 $ 225,000 $ 53,829 $ 12,381 $ 212,619 66 67 68 70 Net cash flow Year 0 71 Net cash flow Year 1 72 Net cash flow Year 2 73 Net cash flow Year 3 74 NPV -$2,590,000 $1,018,692 $1,077,773 $1,412,915 $235,596.59

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