Question

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. The project is estimated to generate $2,290,000 in annual sales, with costs of $1,310,000. The project requires an initial investment in net working capital of $160,000 and the fixed asset will have a market value of $195,000 at the end of the project. Assume that the tax rate is 21 percent and the required return on the project is 10 percent. a. What are the net cash flows of the project each year? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, 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

rate positively .. let me know if you need any clarification..

Ans a)	Computation of net cash flow each year
	Initial investment =			(2,350,000)
	Working capita increase =			(160,000)
	Year 0 cash flow =			(2,510,000)
	Annual depreciation = 2350000/3				783,333
	Post tax salvage value = 195000*(1-21%)				154050
	Computation of year 1 to year 3 cash flow
		i	ii	iii	iv=i-ii-iii	v=iv*21%	vi=iv-v	vii=vi+iii	viii	ix	x=vii+viii+ix
	year	Revenue	Cost	Depreciation	profit before tax	Tax @ 21%	Profit after tax	Operating cash flow	Post tax salvage value	release of working capital	total cash flow
	1	2290000	1310000	783,333	196,667	41,300	155,367	938,700			938,700
	2	2290000	1310000	783,333	196,667	41,300	155,367	938,700			938,700
	3	2290000	1310000	783,333	196,667	41,300	155,367	938,700	154050	160,000	1,252,750
Solution a)
	Year 0 cash flow	(2,510,000)
	Year 1 cash flow	938,700
	Year 2 cash flow	938,700
	Year 3 cash flow	1,252,750
Ans b)	Computation of NPV
	year	Cash flow	PVIF @ 10%	present value
	0	(2,510,000)	1	(2,510,000)
	1	938,700	0.909091	853,364
	2	938,700	0.826446	775,785
	3	1,252,750	0.751315	941,210
				60,358
	NPV =	60,358