Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2660110 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.19 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 $2,180,000 in annual sales, with costs of $1,170,000. The project requires an initial investment in net working capital of $153,000, and the fixed asset will have a market value of $178,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 12 percent.
What are the net cash flows of the project for the following years? (Do not include the dollar signs ($). Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).)
What is the NPV of the project? (Do not include the dollar sign ($). 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 $2.19 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 $2,180,000 in annual sales, with costs of $1,170,000. The project requires an initial investment in net working capital of $153,000, and the fixed asset will have a market value of $178,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 12 percent.
Explanation / Answer
Depreciation per year = 2190000/3
=730000
year
Cashflows
P.V @ 12%
0
Project cost + increase in working capital
= -( 2190000 + 153000)
= -2343000
-2343000
1
(2180000-1170000-730000)*0.65 + 730000
= 912000
912000/(1.12^1)
=814286
2
(2180000-1170000-730000)*0.65 + 730000
= 912000
912000/(1.12^2)
=727041
3
(2180000-1170000-730000)*0.65 + 730000 + RECOVERY OF W.C. + SALE PROCEEDS OF F.A.
= 912000 + 153000 + 178000*0.65
= 1180700
1180700/(1.12^3)
=840399
NPV =
38726
year
Cashflows
P.V @ 12%
0
Project cost + increase in working capital
= -( 2190000 + 153000)
= -2343000
-2343000
1
(2180000-1170000-730000)*0.65 + 730000
= 912000
912000/(1.12^1)
=814286
2
(2180000-1170000-730000)*0.65 + 730000
= 912000
912000/(1.12^2)
=727041
3
(2180000-1170000-730000)*0.65 + 730000 + RECOVERY OF W.C. + SALE PROCEEDS OF F.A.
= 912000 + 153000 + 178000*0.65
= 1180700
1180700/(1.12^3)
=840399
NPV =
38726