Cochrane Inc., is considering a new three-year expansion project that requires a
ID: 2661108 • Letter: C
Question
Cochrane
Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. 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 $1,950,000 in annual sales, with costs of $1,060,000. Assume the tax rate is 35 percent and the required return on the project is 14 percent.
What is the project
Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. 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 $1,950,000 in annual sales, with costs of $1,060,000. Assume the tax rate is 35 percent and the required return on the project is 14 percent.
Explanation / Answer
Hi,
Please find the answer as follows:
Initial Investment = -1860000
Annual Cash Inflows = (Sales- Costs - Depreciation)*(1-Tax Rate) + Depreciation = (1950000 - 1060000 - 1860000/3)*(1-.35) + 1860000/3 = 795500
NPV = -1860000 + 795500/(1+.14)^1 + 795500/(1+.14)^2 + 795500/(1+.14)^3 = -13141.72
Answer is -13141.72
Thanks.