Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2762134 • 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).)
Explanation / Answer
CALCULATION OF PRESENT VALUE OF CASH INFLOW (PVCI) Yr 1 Yr 2 Yr Sales 2320000 2210000 2210000 Less: Cost 1310000 1200000 1200000 Less:Depreciation 870000 870000 870000 [$2610000/3yr] PBT 140000 140000 140000 Less: Tax (40%) 56000 56000 56000 PAT 84000 84000 84000 Add: Dep 870000 870000 870000 CFAT 954000 954000 954000 pvf @ 6% 0.994036 0.98810714 0.982214 PVCI 948310.1 942654.214 937032 TOTAL PVCI 2827996 PRESENT VALUEOF CASHOUTFLOW (PVCO) COST OF MACHINE $2,610,000 NPV = PVCI-PVCO = $2827996-2610000 =217996 $