Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2749901 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,190,000. 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 $2,180,000 in annual sales, with costs of $1,170,000. Assume the tax rate is 35 percent and the required return on the project is 11 percent.
What is the NPV?
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,190,000. 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 $2,180,000 in annual sales, with costs of $1,170,000. Assume the tax rate is 35 percent and the required return on the project is 11 percent.
What is the NPV?
Explanation / Answer
Initial fixed asset investment = 2190000
Annual Cash flow = (annual sales - Cost)*(1-tax rate) + Annual Depreciation*tax rate
Annual Cash flow = (2180000-1170000)*(1-35%) + 2190000/3 * 35%
Annual Cash flow = $ 912000
NPV = -initial Investment + Annual Cash flow *(1-(1+r)^-n)/r
NPV = -2190000 + 912000*(1-(1+11%)^-3)/11%
NPV = $ 38,667.82