Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2765540 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,280,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,210,000 in annual sales, with costs of $1,200,000. The project requires an initial investment in net working capital of $156,000, and the fixed asset will have a market value of $181,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 11 percent. What are the net cash flows of the project for the next 3 years? What is the NPV of the project?
Explanation / Answer
Calculation of NPV Year Cash Flow(In $) PVAF11% NPV(In $) 0 -2436000 1 -2436000 1 922500 0.9009 831080.25 2 922500 0.8116 748701.00 3 1196150 0.73119 874612.92 NPV 18394.169 Note 1: Calculation of $2436000 Initial Fixed Asset Investment 2280000 Net Working Capital 156000 2436000 Note 2 Calculation of 1196150 $922500+156000+181000-(0-181000)*35%