Question

Che Problem 9-12 NPV and Modified ACRS [LO 2] Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 million. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,320,000 in annual sales, with costs of $1,310,000. The project requires an initial investment in net working capital of $167,000, and the fixed asset will have a market value of $192,000 at the end of the project. Assume that the tax rate is 40 percent and the required return on the project is 6 percent Requirement 1: What is the net cash flow of the project for the following years? (Do not include the dollar signs ($).Negative amounts should be indicated by a minus sign.Enter your answers in dollars, not millions of dollars (e.g., 1,234,567). Round your answers to 2 decimal places (e.g., 32.16).) Year Cash Flow $ O-NM Requirement 2: What is the NPV of the project? (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).) NPV $

Answer 1

solution: 0 2 sales Less : costs Less : depreciation ** EBT 2320000.00 -1310000.00 -869913.00 140087.00 -56034.80 84052.20 869913.00 953965.20 2320000.00 -1310000.00 - 1160145.00 -150145.00 60058.00 -90087.00 1160145.00 1070058.00 3 2320000.00 -1310000.00 -386541.00 623459.00 -249383.60 374075.40 386541.00 760616.40 tax at 40% EAT Add : depreciation OCF -2610000.00 -167000.00 Inital cost working capital changes after tax sale value* Net cash flow 167000.00 192560.40 1120176.80 -2777000.00 953965.20 1070058.00 workings: **depreciation cost 1 2610000.00 0.3333 869913.00 2 2610000.00 0.4445 1160145.00 3 total 2610000.00 0.1481 386541.00 2416599.00 x depreciation rate depreciation after tax sale value* cost accumulated depreciation book value sale value Loss on sale tax shield on loss =1401*0.4 after tax sale value 2,610,000.00 2,416,599.00 193,401.00 192,000.00 1,401.00 560.40 192,560.40 discount factor formula = 1/(1+r)^n Part b: Net cash flow discount factor at 6% PV NPV 1 0 -2,777,000.00 1.00000 |- 2.777,000.00 15,837.02 1 953,965.20 0.94340 899,967.17 1,070,058.00 0.89000 952,347.81 3 1,120,176.80 0.83962 940,522.04