Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.15 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 $2.23 million in annual sales, with costs of $1.25 million. The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $185,000 at the end of the project. Assume that the tax rate is 23 percent and the required return on the project is 14 percent.

a. What are the net cash flows of the project for each year? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

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.)

Answer 1

after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale less: less: $185,000.00 $0.00 $185,000.00 $2,230,000.00 $1,250,000.00 $716,666.67 $263,333.33 $60,566.67 $202,766.67 $716,666.67 $2,230,000.00 $1,250,000.00 $716,666.67 $263,333.33 $60,566.67 $202,766.67 $716,666.67 $919,433.33 $2,230,000.00 $1,250,000.00 $716,666.67 $263,333.33 $60,566.67 $202,766.67 $716,666.67 $919,433.33 less: salvage value less: tax on gain after tax salvage value $185,000.00 $42,550.00 $142,450.00 add: $150,000.00 YEAR annual sales costs depreciation EBT tax @23% EAT depreciation OCF initial investment: plant -$2,150,000 working capital -$150,000 after tax salvage value: plant Cash flows -$2,300,000.00 pv @ 14% 1 PRESENT VALUE -$2,300,000.00 NPV $31,981.29 Cash flows year 0 $2,300,000.00 year 1 $919,433.33 year 2 $919,433.33 year 3 $1,211,883.33 NPV $31,981.29 $919,433.33 0.87719 $806,520.47 $919,433.33 0.76947 $707,474.09 $142,450.00 $1,211,883.33 0.67497 $817,986.73