Question

H. Cochran Enterprises is considering a new three year expansion project that requires an initial fixed asset investment of $2.38 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,760,000 in annual sales, with costs of $660,000. The project requires an initial investment in net working capital of $350,000, and the fixed asset will have a market value of $330,000 at the end of the project. a. If the tax rate is 25 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 answer to two decimal places, e.g., 32.16.) b. If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16.) Les Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow b. NPV

Answer 1

rate positively ..

	Computation of NPV
	year	0	1	2	3
i	Initial investment	-2380000
ii	Working capital	-350000
A=i+ii	Initial investment	(2,730,000)
	operating cash flow
i	Revenue		1,760,000	1,760,000	1,760,000
ii	cost		660,000	660,000	660,000
iii	depreciation		2,380,000	-	-
iv=i-iii	Profit before tax		(1,280,000)	1,100,000	1,100,000
v=iv*25%	Tax@ 25%		(320,000)	275,000	275,000
vi=iv-v	Profit after tax		(960,000)	825,000	825,000
B=vi+iii	operating cash flow		1,420,000	825,000	825,000
	Terminal cash flow
i	Release of working capital =				350,000
ii	Post tax salvage value
	=330000*(1-25%)				247500
C	NWC + salvage value				597500
D=A+B+C	Net cash flow	(2,730,000)	1,420,000	825,000	1,422,500
D	PVIF @ 10%	1.0000	0.9091	0.8264	0.7513
E=C*D	present value	(2,730,000)	1,290,909	681,818	1,068,745		311,473
	Therefore NPV =	311,473
	Answer = option	311,473