Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2633817 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,160,000. 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 $2,170,000 in annual sales, with costs of $1,160,000. The project requires an initial investment in net working capital of $152,000, and the fixed asset will have a market value of $177,000 at the end of the project. Assume that the tax rate is 40 percent and the required return on the project is 12 percent.
What are the net cash flows of the project for the following years? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).)
What is the NPV of the project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).)
Requirement 1:What are the net cash flows of the project for the following years? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).)
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Initial Investment (Year 0 Cash Flow) = -2160000 - 152000 = -2312000
Annual Cash Inflow = (Sales - Costs - Depreciation)*(1-Tax Rate) = (2170000 - 1160000 - 2160000/3)*(1-.40) + 2160000/3 = 894000
Terminal Year Cash Inflow = Annual Cash Inflow + Recovery of Working Capital + Market Value*(1-Tax Rate) = 894000 + 152000 + 177000*(1-.40) = 1152200
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Table of Cash Flows:
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Part B:
NPV = -2312000 + 894000/(1+.12)^1 + 894000/(1+.12)^2 + 1152200/(1+.12)^3 = $19018.81
Thanks.
Year Cash Flow Year 0 -2312000 Year 1 894000 Year 2 894000 Year 3 1152200