Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2647755 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,550,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,300,000 in annual sales, with costs of $1,290,000. The project requires an initial investment in net working capital of $165,000, and the fixed asset will have a market value of $190,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 7 percent.
What is the net cash flow of the project for the following years?
0
1
2
3
What is the NPV of the project?
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,550,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,300,000 in annual sales, with costs of $1,290,000. The project requires an initial investment in net working capital of $165,000, and the fixed asset will have a market value of $190,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 7 percent.
Explanation / Answer
Initial Investment in the project = Fixed Asset Investment + Initial Investment in Net working capital
= 2550000 + 165000
= 2715000
Net Cash Flow for the Projects for the following years after discounting them @ 7%.
NPV is basically the difference between the sum of present value of all cash inflows which a project generates over the years and the initial investment (cash outflow) of a particular project.
Hence, NPV = 613551.4 + 573412.5 + 690996.2 - 2715000
= - 837040
It is generating a negative NPV, hence, this project should not be accepted.
Particulars Year 1 Year 2 Year 3 Annual Sales 2300000 2300000 2300000 Cost 1290000 1290000 1290000 Net Income before Tax 1010000 1010000 1010000 Tax@35% 353500 353500 353500 Net Income after Tax 656500 656500 656500 Market Value of Asset at the end of the project 190000 Expected cash flows 656500 656500 846500 Required rate of Return on Investment 7%Net Cash Flow for the Projects for the following years after discounting them @ 7%.
Year 0 -2715000 Year 1 613551.4 Year 2 573412.5 Year 3 690996.2