Question

H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,180,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,730,000 in annual sales, with costs of $636,000. The project requires an initial investment in net working capital of $290,000, and the fixed asset will have a market value of $240,000 at the end of the project. a. If the tax rate is 24 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 answers to two decimal places, e.g., 32.16.) b. If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to two 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

a.	Year 0 Cash flow		$ -24,70,000.00
	Year 1 Cash flow		$   10,05,822.56
	Year 2 Cash flow		$   10,64,002.40
	Year 3 Cash flow		$   14,20,095.04
b.	NPV		$     2,87,067.66

Working:

Year			0	1	2	3
Cost of project			$       -21,80,000
Investment in net working capital			$          -2,90,000
Annual sales				$ 17,30,000.00	$ 17,30,000.00	$ 17,30,000.00
Cost of sales				$ -6,36,000.00	$ -6,36,000.00	$ -6,36,000.00
Depreciation expense				$ -7,26,594.00	$ -9,69,010.00	$ -3,22,858.00
Pretax income				$    3,67,406.00	$    1,24,990.00	$    7,71,142.00
Tax expense				$      -88,177.44	$      -29,997.60	$ -1,85,074.08
Operating income				$    2,79,228.56	$       94,992.40	$    5,86,067.92
Depreciation expense				$    7,26,594.00	$    9,69,010.00	$    3,22,858.00
Operating cash flow				$ 10,05,822.56	$ 10,64,002.40	$    9,08,925.92
After tax sale of asset						$    2,21,169.12
Release of net working capital						$          2,90,000
Cash flow			$ -24,70,000.00	$ 10,05,822.56	$ 10,64,002.40	$ 14,20,095.04
Discount factor			1.00000	0.89286	0.79719	0.71178
Present value			$ -24,70,000.00	$    8,98,055.86	$    8,48,216.20	$ 10,10,795.60
Net Present value (NPV)			$     2,87,067.66
Working:
Depreciation Tax Schedule:
Year	Cost	Depreciation rate	Depreciation expense	Accumulated Depreciation expense	Ending Book Value
	a	b	c=a*b	d	e=a-d
1	$       21,80,000	33.33%	$     7,26,594.00	$    7,26,594.00	$ 14,53,406.00
2	$       21,80,000	44.45%	$     9,69,010.00	$ 16,95,604.00	$    4,84,396.00
3	$       21,80,000	14.81%	$     3,22,858.00	$ 20,18,462.00	$    1,61,538.00
After tax sale of system		=	Sales -((Sales - Book Value)*Tax Rate)	*	(1- Tax Rate)
		=	240000-((240000-161538)*24%)
		=	$     2,21,169.12
Discount factor of Year:
0		=	1.12^-0	=	1.0000
1		=	1.12^-1	=	0.8929
2		=	1.12^-2	=	0.7972
3		=	1.12^-3	=	0.7118