Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2624614 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,130,000. 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 $2,160,000 in annual sales, with costs of $1,150,000. Assume the tax rate is 30 percent and the required return on the project is 14 percent.
What is the project
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,130,000. 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 $2,160,000 in annual sales, with costs of $1,150,000. Assume the tax rate is 30 percent and the required return on the project is 14 percent.
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Initial Investment = -2130000
Annual Cash Inflows = (Annual Sales - Annual Costs - Depreciation)*(1-Tax Rate) + Depreciation = (2160000 - 1150000 - 2130000/3)*(1-30%) + 2130000/3 = 920000
NPV = -2130000 + 920000/(1+.14)^1 + 920000/(1+.14)^2 + 920000/(1+.14)^3 = 5901.465 or 5901.47
Answer is 5901.465 or 5901.47.
Thanks.