Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2504504 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,310,000. 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 $2,220,000 in annual sales, with costs of $1,210,000. Assume the tax rate is 30 percent and the required return on the project is 11 percent.
What is the project
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,310,000. 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 $2,220,000 in annual sales, with costs of $1,210,000. Assume the tax rate is 30 percent and the required return on the project is 11 percent.
Explanation / Answer
annual profit = 2,220,000 - 1,210,000 - (2,220,000 - 1,210,000 - 770,000)*0.3
= 878000
NPV = -2,310,1000 + 878000/(1.11) + 878000/(1.11^2) + 878000/(1.1^3)
= -164418