Question

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.1 million. 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 $2,150,000 in annual sales, with costs of $1,140,000. Assume the tax rate is 35 percent and the required return on the project is 14 percent. WHAT IS THE PROJECTS NPV?

Answer 1

NPV is difference between Present value of cash inflow and Present value of cash outflow .

We have Present value of cash outflow = $2,100,000 .

Present value of cash inflow = ?

so we have to calculate Present value of Cash infow.

PV of Cash inflow = Operating cashflow/ (1+R)^t

OCF = (Sales – Costs)(1 – T) + Depreciation(T)

OCF = ($2,150,000 – 1,140,000)(1 – 0.35) + 0.35($2,100,000/3)

OCF = $901,500

So now NPV =[ 901500/(1+.14)^3 ] - 2,100,000

NPV = –$7,048.73