Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2769373 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,520,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,290,000 in annual sales, with costs of $1,280,000. The project requires an initial investment in net working capital of $164,000, and the fixed asset will have a market value of $189,000 at the end of the project. Assume that the tax rate is 40 percent and the required return on the project is 7 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).)
Year Cash Flow
0
1
2
3
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 -47,910 <------- ???? Is this right?
Explanation / Answer
Year 1 2 3 Annual Sales a $2,290,000.00 $2,290,000.00 $2,290,000.00 Costs b $1,280,000.00 $1,280,000.00 $1,280,000.00 Depreciation per year $2520000 / 3 years c $840,000.00 $840,000.00 $840,000.00 Earnings before Tax d = a-b-c $170,000.00 $170,000.00 $170,000.00 Taxes at 40% e = d*40% $68,000.00 $68,000.00 $68,000.00 Earnings after Tax f = d - e $102,000.00 $102,000.00 $102,000.00 Depreciation g $840,000.00 $840,000.00 $840,000.00 Cashflow from operations h = f+g $942,000.00 $942,000.00 $942,000.00 Working Capital Realization i $0.00 $0.00 $164,000.00 Post tax salvage value of Machine j $0.00 $0.00 $113,400.00 Net Cashflows k = h+i+j $942,000.00 $942,000.00 $1,219,400.00 PV Factor at 7% l 0.9346 0.8734 0.8163 Present Value at 7% m = k*l $880,373.83 $822,779.28 $995,393.63 PV of Inflow at 7% $2,698,546.74 Initial Outflow Machine Cost $2,520,000.00 Working Capital $164,000.00 $2,684,000.00 NPV = 2698546.74 - 2684000 = $14546.74 Note 1 Purchase Cost of Machine $2,520,000.00 Less: Accumulated Depreciation $2,520,000.00 Book Value (a) $0.00 Market Value of Machine (b) $189,000.00 Profit on Sale on Machine (c = b-a) $189,000.00 Tax on Profit (d = c*40%) $75,600.00 Post Tax Salvage Value (b-d) $113,400.00