Question

H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,370,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,780,000 in annual sales, with costs of $676,000. The project requires an initial investment in net working capital of $390,000, and the fixed asset will have a market value of $390,000 at the end of the project.

  

a.	If the tax rate is 24 percent, what is the project’s Year 0 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 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.)

Answer 1

- 2370000*0.3333 D52 A В C G н K M N Working After-tax Net cash PVIF@ Depreciatio Net ОCF 10% capital flow 50 Year Revenue Costs РВТ Таx@24% income Depreciation Investment Present value $(390,000) $(2,370,000) $(2,760,000)1.000 $ 0.909 $ 0.826 S 350,997$ 923,279 $390,000 338,548$1,651,827 0.751 $ (2,760,000.00) 51 0 1 $1,780,000 $676,000 789,921 | $ 2$1,780,000 $676,000 $1,053,465$ 3 $1,780,000 $676,000 350,997$753,003 $180,721 $572,282 $ 314,079 75,379$238,700 $ 50,535 12,128 38,407 $1,053,465 $1,091,872 $ $ 1,028,621 $1,091,872 789,921 $1,028,621 $ 52 935,110.04 902,373.22 53 54 1,241,042.34 55 $318,525.60 Net present value 56 Asset cost $ 2,370,000 $ 2,194,383 62 Less: Depreciation charged 63 $175,617 WDV at the time of sale 64 Sale value of machine $390,000 $214,383 $ 65 Profit/(Loss) on sale 66 51,452 $338,548 67 Less: Tax @ 24% After tax cash salvage value 68 69 -$2,760,000 $1,028,621 $1,091,872 $1,651,827 $318,525.60 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

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