Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2759019 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,610,000. 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 $2,320,000 in annual sales, with costs of $1,310,000. Assume the tax rate is 40 percent and the required return on the project is 6 percent.
What is the project’s NPV? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. 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).)
Required:What is the project’s NPV? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. 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).)
Explanation / Answer
Year 0 1 2 3 Initial investment 2610000 0 0 0 Tax saving on dep 0 348000 348000 348000 Revenue (2320000-1310000) net of tax 606000 606000 606000 2610000 954000 954000 954000 PVF @ 6% 1 0.943 $0.890 $0.840 900000 849057 800997 TOTAL 2550053 INITIAL OUTFLOW - 2610000 NPV - 59947