Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2756552 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,340,000. 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 $2,230,000 in annual sales, with costs of $1,220,000. The project requires an initial investment in net working capital of $158,000, and the fixed asset will have a market value of $183,000 at the end of the project. Assume that the tax rate is 40 percent and the required return on the project is 9 percent. Requirement 1: What are the net cash flows of the project for the following years? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).)
Requirement 2: What is the NPV of the project? (Do not round 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).)
NPV $
Year Cash Flow 0 $ 1 2 3Explanation / Answer
Requirement 1 (All values in $) Year Cash Flow Particulars 0 -2498000.00 Initial Fixed Asset Investments + Working Capital 1 606000.00 Sales - Costs - Tax Impact 2 606000.00 Sales - Costs - Tax Impact 3 789000.00 Sales - Costs - Tax Impact + Sale Value of Fixed Asset on end of project Requirement 2 Required Rate of Return on Project 9% Cash Flows Per Requirement 1 NPV Calculation - $ 745,794.36