Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,350,000. 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 $3,310,000 in annual sales, with costs of $2,330,000. Assume the tax rate is 23 percent and the required return on the project is 11 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.)

Answer 1

YEAR 0 $3,310,000.00 $2,330,000.00 $783,333.33 $3,310,000.00 $3,310,000.00 annual sales less: less: $2,330,000.00 $2,330,000.00 $783,333.33 costs $783,333.33 $196,666.67 depreciation $196,666.67 $196,666.67 ЕВT less: $45,233.33 $45,233.33 $151,433.33 $45,233.33 $151,433.33 tax @23% $151,433.33 $783,333.33 $934,766.67 EAT add: $783,333.33 $783,333.33 $934,766.67 depreciation $934,766.67 ОCF initial investment -$2,350,000 -$2,350,000.00 plant $934,766.67 $934,766.67 $934,766.67 Cash flows 1 0.90090 0.81162 0.73119 pv@11% -$2,350,000.00 $842,132.13 $758,677.60 $683,493.33 PRESENT VALUE -$65,696.94 NPV Cash flows -$2,350,000.00 $934,766.67 $934,766.67 $934,766.67 -$65,696.94 year 0 year 1 year 2 year 3 NPV