Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2634107 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,460,000. 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 $2,270,000 in annual sales, with costs of $1,260,000. Assume the tax rate is 35 percent and the required return on the project is 8 percent.
What is the project
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,460,000. 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 $2,270,000 in annual sales, with costs of $1,260,000. Assume the tax rate is 35 percent and the required return on the project is 8 percent.
Explanation / Answer
Depreciation = 2460000/3
=$820000
Annual cash inflow = (2270000-1260000-820000)*(1-35%)+820000
=$943500
NPV of the project:
hence, the NPV is -$28508.99
year cashflow present value 0 -2460000 -2460000 1 943500 873611.11 2 943500 808899.18 3 943500 748980.72 NPV -28508.99