Time line | 0 | 1 | 2 | 3 | |||
Cost of new machine | -2430000 | ||||||
Initial working capital | -166000 | ||||||
=Initial Investment outlay | -2596000 | ||||||
100.00% | |||||||
Sales | 2810000 | 2810000 | 2810000 | ||||
Profits | Sales-variable cost | 1020000 | 1020000 | 1020000 | |||
-Depreciation | Cost of equipment/no. of years | -810000 | -810000 | -810000 | 0 | =Salvage Value | |
=Pretax cash flows | 210000 | 210000 | 210000 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | 159600 | 159600 | 159600 | |||
+Depreciation | 810000 | 810000 | 810000 | ||||
=after tax operating cash flow | 969600 | 969600 | 969600 | ||||
reversal of working capital | 166000 | ||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 152760 | |||||
+Tax shield on salvage book value | =Salvage value * tax rate | 0 | |||||
=Terminal year after tax cash flows | 318760 | ||||||
a. Total Cash flow for the period | -2596000 | 969600 | 969600 | 1288360 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.1 | 1.21 | 1.331 | ||
Discounted CF= | Cashflow/discount factor | -2596000 | 881454.5455 | 801322.314 | 967963.9369 | ||
b. NPV= | Sum of discounted CF= | 54740.80 |
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset...
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