Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2644729 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 million. 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 $2,330,000 in annual sales, with costs of $1,320,000. The project requires an initial investment in net working capital of $168,000, and the fixed asset will have a market value of $193,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 6 percent. Requirement 1: What are the net cash flows of the project for the following years? (Do not include the dollar signs (S). Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).) Requirement 2: What is the NPV of the project? (Do not include the dollar sign (s). 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).)Explanation / Answer
Requirement 1:
Year
Cashflow
0
$
-2808000
1
$
964500
2
$
964500
3
$
1325500
Requirement 2:
NPV
$
73222.59
Working:
Year
Sales
Cost
Depreciation
PBT
TAX
PAT
Operation CF
A
B
C
D = A-B-C
E
F = D-E
G = F + C
1
2330000
1320000
880000
130000
45500
84500
964500
2
2330000
1320000
880000
130000
45500
84500
964500
3
2330000
1320000
880000
130000
45500
84500
964500
Year
FA
WC
Operation CF
Net CF
Disc. Rate
Disc. CF
0
-2640000
-168000
-
-2808000
1
-2808000.00
1
-
-
964500
964500
0.94
909905.66
2
-
-
964500
964500
0.89
858401.57
3
193000
168000
964500
1325500
0.84
1112915.36
446500
73222.59
Year
Cashflow
0
$
-2808000
1
$
964500
2
$
964500
3
$
1325500