Cochrane Inc is considering a new threeyear expansion projec

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. The project is estimated to generate $2,320,000 in annual sales, with costs of $1,300,000. The project requires an initial investment in net working capital of $167,000, and the fixed asset will have a market value of $192,000 at the end of the project. Assume that the tax rate is 40 percent and the required return on the project is 6 percent.

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).)

What is the NPV of the project?

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. The project is estimated to generate $2,320,000 in annual sales, with costs of $1,300,000. The project requires an initial investment in net working capital of $167,000, and the fixed asset will have a market value of $192,000 at the end of the project. Assume that the tax rate is 40 percent and the required return on the project is 6 percent.

Solution

Solution - Requirement 1 Cashflow for Year Amount Y0 $(2,777,000.00) Y1 $     960,000.00 Y2 $     960,000.00 Y3 $ 1,242,200.00 (Y3 includes the realization of initial investment of working capital) Solution - Requirement 2 Cashflow for Year PVF@6% Amount PV NPV Y0 $ (2,777,000.00) $               (2,777,000.00) Y1 0.943396226 $      960,000.00 $                    905,660.38 Y2 0.88999644 $      960,000.00 $                    854,396.58 Y3 0.839619283 $ 1,242,200.00 $                1,042,975.07 $                      26,032.03 Working Notes Depritiation Per annum for tax life Initial Investment Fixed Assets $             (2,610,000.00) $                 (870,000.00) Working Capital $                 (167,000.00) Year 1 Year 2 Year 3 Annual Sales $               2,320,000.00 $               2,320,000.00 $               2,320,000.00 Less : Annual Cost of Sales $             (1,300,000.00) $             (1,300,000.00) $             (1,300,000.00) Add : Sale of Initial Fixed Assets at Year 3 $                   192,000.00 Profit $               1,020,000.00 $               1,020,000.00 $               1,212,000.00 Less : Depritiaion $                 (870,000.00) $                 (870,000.00) $                 (870,000.00) Profit Before Tax $                   150,000.00 $                   150,000.00 $                   342,000.00 Less : Tax @40% $                   (60,000.00) $                   (60,000.00) $                 (136,800.00) Profit After Tax $                     90,000.00 $                     90,000.00 $                   205,200.00 Add : Depritiation $                   870,000.00 $                   870,000.00 $                   870,000.00 Cash Flow for the year $                   960,000.00 $                   960,000.00 $               1,075,200.00