Question

H. Cochran Enterprises is considering a new three year expansion project that requires an initial fixed asset investment of $2.38 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,760,000 in annual sales, with costs of $660,000. The project requires an initial investment in net working capital of $350,000, and the fixed asset will have a market value of $330,000 at the end of the project. a. If the tax rate is 25 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 answer to two decimal places, e.g., 32.16.) b. If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16.) $ Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow NPV -2,470,000 X 1,005 823 X 1,064,002 X 1.420095 X 287 067 66

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B D E F G Year 1 Year 2 Year 3 Initial Fixed Cost Initial NWC Year o $2,380,000.00 $350,000.00 $1,760,000.00 $660,000.00 $1,760,000.00 $660,000.00 Sales Costs Depreciation (100% in Year 1) NOPBT Tax (25%) NOPAT Operating Cash Flow After tax salvage value NWC recovered Net Cash Flow $1,760,000.00 $660,000.00 $2,380,000.00 -$1,280,000.00 -$320,000.00 -$960,000.00 $1,420,000.00 $1,100,000.00 $275,000.00 $825,000.00 $825,000.00 $1,100,000.00 $275,000.00 $825,000.00 $825,000.00 $247,500.00 $350,000.00 $1,422,500.00 a. -$2,730,000.00 $1,420,000.00 $825,000.00 15 16 17 Required return b. NPV of Project 10% $311,472.58 19 20

Cell reference -

ДА В D E I FG Year o Year 1 Year 2 Year 3 Initial Fixed Cost Initial NWC 2380000 350000 Sales Costs Depreciation (100% in Year 1) NOPBT Tax (25%) NOPAT Operating Cash Flow After tax salvage value NWC recovered Net Cash Flow 1760000 1760000 1760000 660000 660000 660000 =D3 =E6-E7-E8 =F6-F7-F8 =G6-67-68 =E9*0.25 =F9*0.25 =G9*0.25 =E9-E10 =F9-F10 =G9-610 =E11+E8 =F11+F8 =G11+G8 =330000*(1-0.25) =D4 =SUM(E12:E14) =SUM(F12:F14) =SUM(G12:G14) a. --SUM(D3:04) Required return NPV of Project 0.1 |=D15+NPV(D17,E15:515) | b.

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