Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2634108 • 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 falls into the three-year MACRS class (MACRS Table). 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 is the net cash flow of the project for the following years? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567). Round your answers to 2decimal places (e.g., 32.16).)
What is the NPV of the project? (Enter rounded answer as directed, but do not use rounded numbers in 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).)
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,160,000. The fixed asset falls into the three-year MACRS class (MACRS Table). 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.
Explanation / Answer
initial fixed asset investment of $2,160,000. year Depreciation per year 1 0.3333 719,928 2 0.4445 641,552.07 3 0.1481 118,260.80 initial investment in net working capital of $152,000, salvage value = $177,000 tax rate is 40 percent required return on the project is 12 percent. annual sales = $2,170,000 annual cost = $1,160,000 operating cash flow =( annual sales - annual cost - depreciation for the year )X tax rate OCF year 1 =( 2,170,000 - 1,160,000 - 719,928) X 0.60 = $ 174,043.20 OCF year 2 =( 2,170,000 - 1,160,000 -641552.07)X0.60 = $ 221,068.75 OCF year 3 = ( 2,170,000 - 1,160,000 -118,260.80)X0.60 = $ 535,043.52 To calculate NPV Year OCF Discount factor@ 12% Present value of cash flows 0 2,312,000 1 $174,043.20 0.893 $155,420.58 2 $221,068.75 0.797 $176,191.79 3 $535,043.52 0.712 $380,950.99 $712,563.36 NPV = - cash outflows + cash inflows + present value of salvage value NPV = - 2,312,000+712,563.36 + 126,024 = -$1,473,412.64