Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $215 million. The fixed asset qualifies for 100 percent bonus depreciation. The project is estimated to generate $2.23 million in annual sales, with costs of $1.25 million. The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $185.000 at the end of the project. Assume that the tax rate is 23 percent and the required return on the project is 14 percent. a. What is the net cash flow of the project for each year? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest dollar, e.g., 32.) b. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. 32.16.) Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow b. NPV

Answer 1

Answer:

a. Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow b. NPV -$1,805,500 $754,600 $754,600 $1,047,050 $143,798.95

Working:

Year Fixed asset Investment Net Working capital -$2,150,000 -$150,000 $0 $0 Annual sales Annual cost Bonus depreciation 100% EBIT Tax EAT Add back depreciatiation Cash flow from operations $0 $0 -$2,150,000 -$2,150,000 $494,500 -$1,655,500 $2,150,000 $494,500 $2,230,000 $2,230,000 $2,230,000 -$1,250,000-$1,250,000-$1,250,000 $0 $980,000 $980,000 $980,000 $225,400 $225,4001 -$225,400 $754,600 $754,600 $754,600 $0 $0 $754,600 $754,600 $754,600 $0 Salvage value net of Tax Recovery of working capital $142,450 $150,000 Cash flow $754,600 $754,600 $1,047,050 $1,805,500 $143,798.95 NPV

Above excel with 'show formula'is as follows:

-2150000 - 150000 lo 2230000 2230000 2230000 --1250000 |--1250000 --1250000 1 Year 2 Fixed asset Investment 3 Net Working capital 4 5 Annual sales 6 Annual cost 7 Bonus depreciation 100% 8 EBIT 9 Tax 10 EAT 11 Add back depreciatiation 12 Cash flow from operations 0 =B2 =B7 =B7*-23% =B8+B9 --B7 =B10+B11 =C5+C6 =D5+D6 =E5+E6 =C8*-23% =D8*-23% =E8*-23% =C8+c9 =D8+D9 =E8+E9 --C7 --D7 E7 =C10+C11 =D10+D11 =E10+E11 13 =185000*(1-23%) --B3 14 Salvage value net of Tax 15 Recovery of working capital 16 17 Cash flow 18 NPV =C12 =D12 =E12+E14+E15 =B2+B3+B12 =NPV(14%,C17:E17)+B17 19