H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,350,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,745,000 in annual sales, with costs of $648,000. The project requires an initial investment in net working capital of $320,000, and the fixed asset will have a market value of $285,000 at the end of the project. a. If the tax rate is 22 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 11 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16.)
Time line | 0 | 1 | 2 | 3 | |||
Cost of new machine | -2350000 | ||||||
Initial working capital | -320000 | ||||||
=Initial Investment outlay | -2670000 | ||||||
3 years MACR rate | 33.33% | 44.45% | 14.81% | 7.41% | |||
Sales | 1745000 | 1745000 | 1745000 | ||||
Profits | Sales-variable cost | 1097000 | 1097000 | 1097000 | |||
-Depreciation | =Cost of machine*MACR% | -783255 | -1044575 | -348035 | 174135 | =Salvage Value | |
=Pretax cash flows | 313745 | 52425 | 748965 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | 244721.1 | 40891.5 | 584192.7 | |||
+Depreciation | 783255 | 1044575 | 348035 | ||||
=after tax operating cash flow | 1027976.10 | 1085466.50 | 932227.7 | ||||
reversal of working capital | 320000 | ||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 222300 | |||||
+Tax shield on salvage book value | =Salvage value * tax rate | 38309.7 | |||||
=Terminal year after tax cash flows | 580609.7 | ||||||
a. Total Cash flow for the period | -2670000 | 1027976.10 | 1085466.50 | 1512837.400 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.11 | 1.2321 | 1.367631 | ||
Discounted CF= | Cashflow/discount factor | -2670000 | 926104.5946 | 880988.9619 | 1106173.668 | ||
b. NPV= | Sum of discounted CF= | 243267.22 |
H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment...
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 $1,755,000 in annual sales, with costs of $656,000. The project requires an initial investment in net working capital of $340,000, and the fixed asset will have a market value of $315,000 at the end of the project. a. If the tax rate is 24...
H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,290,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,715,000 in annual sales, with costs of $624,000. The project requires an initial investment in net working capital of $260,000, and the fixed asset will have a market value of $195,000 at the end of the project. a. If the tax rate is 21...
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...
H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,310,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,725,000 in annual sales, with costs of $632,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $225,000 at the end of the project. a. If the tax rate is 23...
H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,340,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,740,000 in annual sales, with costs of $644,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $270,000 at the end of the project. a. If the tax rate is 21...
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...
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 $1,765,000 in annual sales, with costs of $664,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $345,000 at the end of the project. a. If the tax rate is 21...
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 $1.755.000 in annual sales, with costs of $656,000. The project requires an initial investment in net working capital of $340,000, and the fixed asset will have a market value of $315,000 at the end of the project. a. If the tax rate is...
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,350,000. 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 $3,310,000 in annual sales, with costs of $2,330,000. Assume the tax rate is 23 percent and the required return on the project is 11 percent. What is the project’s NPV? (A negative answer should...
H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,410,00O. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,775,000 in annual sales, with costs of $672,0000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $375,000 at the end of the project. 10 ooints a. If the tax rate...