Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2644403 • 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 following cash flows?
Cash Flow
0
1
2
3
What is the NPV?
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 following cash flows?
Cash Flow
0
1
Explanation / Answer
Year 1 2 3 Revenue $2,170,000.00 $2,170,000.00 $2,170,000.00 Cost $1,160,000.00 $1,160,000.00 $1,160,000.00 Depreciation $720,000.00 $720,000.00 $720,000.00 EBT $290,000.00 $290,000.00 $290,000.00 Less: Tax @40% $116,000.00 $116,000.00 $116,000.00 PAT $174,000.00 $174,000.00 $174,000.00 Add: Depreciation $720,000.00 $720,000.00 $720,000.00 Annual Cashflow $894,000.00 $894,000.00 $894,000.00 Year Cash Inflow Release of WC Cash from FA Net Cashflow 0 -$2,312,000.00 -$2,312,000.00 1 $894,000.00 $894,000.00 2 $894,000.00 $894,000.00 3 $894,000.00 $152,000.00 $106,200.00 $1,152,200.00 Year Net Cashflow PVF@12% PV 0 -$2,312,000.00 1 -$2,312,000.00 1 $894,000.00 0.892857 $798,214.29 2 $894,000.00 0.797194 $712,691.33 3 $1,152,200.00 0.71178 $820,113.20 NPV $19,018.81