Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2718614 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,460,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,270,000 in annual sales, with costs of $1,260,000. The project requires an initial investment in net working capital of $162,000, and the fixed asset will have a market value of $187,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 8 percent.
What is the net cash flow of the project for the following years? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567). Round your answers to 2decimal places (e.g., 32.16).)
What is the NPV of the project? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. 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 $2,460,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,270,000 in annual sales, with costs of $1,260,000. The project requires an initial investment in net working capital of $162,000, and the fixed asset will have a market value of $187,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 8 percent.
Explanation / Answer
Cash Flow Year 0 = Project Cost + Investment in Working Capital = 2460000 + 162000 = 2622000
Cash Inflows = (Sales - Costs ) * ( 1 - tax) + Tax * Depreciation
Cash flow
year 1 = ( 2270000 - 1260000) * ( 1 - 0.35) + 0.35 * 33.33% * 2460000 = 943500
Cash Flow Year 2 = ( 2270000 - 1260000) * ( 1 - 0.35) + 0.35 * 44.45% * 2460000 = 1039215
Cash Flow Year 3 = ( 2270000 - 1260000) * ( 1 - 0.35) + 0.35 * 14.81% * 2460000 + 162000 + 187000 - tax *( 187000 - 2460000* 7.41%) = 1131364.20
Present Value of cash inflows @8%
Year 1 = 873611
Year 2 = 890959
Year 3 = 898114
Net Present Value = 873611 + 890959+ 898114 - 2622000 = 40684