Cochrane, Inc., is considering a new 3-year expansion project that requires an i
ID: 2689731 • Letter: C
Question
Cochrane, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $3,300,000. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $256,200. The project is estimated to generate $2,928,000 in annual sales, with costs of $1,171,200. The project requires an initial investment in net working capital of $366,000. The tax rate is 32 percent and the required return on the project is 8 percent. The project's net cash flow for Year 0 is $ ____________. The project's net cash flow for each of Years 1 through 2 is $ ____________. And the project's net cash flow for Year 3 is $ ____________. The NPV for this project is $ ____________.Explanation / Answer
Net cash flow in Year 0: fixed asset investment + net working capital investment - 3,900,000 - 300,000 = - 4,200,000 Years 1 and 2: (sales - cost of sales)*(1-T) + depreciation tax gains (annual depreciation*(1-T)) (2,650,000 - 840,000)*(1-0.35) + (3,900,000/3)*(1-0.35) = 1,810,000*0.65 + 1,300,000*0.65 = $2,012,500 Year 3: (sales - cost of sales)*(1-T) + depreciation tax gains (annual depreciation*(1-T)) + after tax scrap value of investment + reversal of net working capital (2,650,000 - 840,000)*(1-0.35) + (3,900,000/3)*(1-0.35) + (210,000 - 0)* (1-0.35) + 300,000 = 1,810,000*0.65 + 1,300,000*0.65 + 210,000*0.65 + 300,000 = $2,458,000 NPV = -4,200,000 + 2,012,500/(1.12) + 2,012,500/(1.12)^2 + 2,458,000/(1.12)^3 = $950,783.53