Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2711981 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,670,000. 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 $2,340,000 in annual sales, with costs of $1,330,000. Assume the tax rate is 30 percent and the required return on the project is 6 percent.
What is the project’s NPV? ___________________
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,670,000. 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 $2,340,000 in annual sales, with costs of $1,330,000. Assume the tax rate is 30 percent and the required return on the project is 6 percent.
Explanation / Answer
Annual Depreciation = 2670000/3 = $890,000
Annual Sales = $2,340,000
Annual Costs = $1,330,000
Annual Cash Flow = (2340000 -1330000)* (1 - 30%) + 30% * 890,000
= $974,000
So, the cash flow table looks like this:
NPV of the project is the sum of dicounted cash flows = -$66486.36
Year Cash Flow Discounted Cash Flow at 6% 0 -2670000 -2670000.00 1 974000 918867.92 2 974000 866856.53 3 974000 817789.18 NPV -66486.36