Problem 9-10 Calculating Project NPV [LO 2] Cochrane, Inc., is considering a new
ID: 2759906 • Letter: P
Question
Problem 9-10 Calculating Project NPV [LO 2] Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,640,000. 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 $2,330,000 in annual sales, with costs of $1,320,000. Assume the tax rate is 35 percent and the required return on the project is 6 percent. Required: What is the project’s NPV?
Explanation / Answer
Statement showing Cash flows Particulars Time PVf@6% Amount PV Cash Outflows - 1.00 (2,640,000.00) (2,640,000.00) PV of Cash outflows=PVCO (2,640,000.00) Cash inflows 1.00 0.9434 964,500.00 909,905.66 Cash inflows 2.00 0.8900 964,500.00 858,401.57 Cash inflows 3.00 0.8396 964,500.00 809,812.80 PV of Cash Inflows = PVCI 2,578,120.03 NPV = PVCI - PVCO (61,879.97) Annual Sales 2,330,000.00 Costs 1,320,000.00 Deprecaiation = 2640,000/3 880,000.00 Income before tax 130,000.00 Tax @35% 45,500.00 Income after Tax 84,500.00 Deprecaiation = 2640,000/3 880,000.00 CFAT = 964,500.00