Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2742528 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,680,000. 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. The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $175,000 at the end of the project. Assume that the tax rate is 34 percent and the required return on the project is 14 percent.
Requirement 1: What are the net cash flows of the project for the following years?
Requirement 2: What is the NPV of the project?
Explanation / Answer
inital investment = 1680000 + 150000 = 18300000
depriciation per year = 1680000/3 = 560000
cash flow per year = (1950000 - 1060000 - 560000) * (1-0.34) + 560000
= 777800
terminal cash flow = 175000 * (1-0.34) = 115500
NPV = -18300000 + 777800/1.14 + 777800/1.14^2 + 777800/1.14^3 + 115500/1.14^3
= 53724.60