Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,290,000. 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 $3,130,000 in annual sales, with costs of $2,150,000. Assume the tax rate is 25 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

Time line		0	1	2	3
Cost of new machine		-2290000
=Initial Investment outlay		-2290000
						100.00%
Sales			3130000	3130000	3130000
Profits	Sales-variable cost		980000	980000	980000
-Depreciation	Cost of equipment/no. of years		-763333.333	-763333.333	-763333.333	0	=Salvage Value
=Pretax cash flows			216666.6667	216666.6667	216666.6667
-taxes	=(Pretax cash flows)*(1-tax)		162500	162500	162500
+Depreciation			763333.3333	763333.3333	763333.3333
=after tax operating cash flow			925833.3333	925833.3333	925833.3333
+Tax shield on salvage book value	=Salvage value * tax rate				0
=Terminal year after tax cash flows					0
Total Cash flow for the period		-2290000	925833.3333	925833.3333	925833.3333
Discount factor=	(1+discount rate)^corresponding period	1	1.12	1.2544	1.404928
Discounted CF=	Cashflow/discount factor	-2290000	826636.9048	738068.665	658989.8794
NPV=	Sum of discounted CF=	-66304.55