Question

H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,340,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,740,000 in annual sales, with costs of $644,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $270,000 at the end of the project. a. If the tax rate is 21 percent, what is the project's Year O net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to two decimal places, e.g., 32.16.) b. If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16.) a. Year 0 cash flow Year 1 cash flow Year 2 cash flow $ | $ -2,650,000.00 1,029,640.00 Year 3 cash flow b. NPV

Answer 1

Time line		0	1	2	3
Cost of new machine		-2340000
Initial working capital		-310000
=Initial Investment outlay		-2650000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Sales			1740000	1740000	1740000
Profits	Sales-variable cost		1096000	1096000	1096000
-Depreciation	=Cost of machine*MACR%		-779922	-1040130	-346554	173394	=Salvage Value
=Pretax cash flows			316078	55870	749446
-taxes	=(Pretax cash flows)*(1-tax)		249701.62	44137.3	592062.34
+Depreciation			779922	1040130	346554
=after tax operating cash flow			1029623.62	1084267.3	938616.34
reversal of working capital					310000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				213300
+Tax shield on salvage book value	=Salvage value * tax rate				36412.74
=Terminal year after tax cash flows					559712.74
a. Total Cash flow for the period		-2650000	1029623.62	1084267.3	1498329.08
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331
Discounted CF=	Cashflow/discount factor	-2650000	936021.4727	896088.6777	1125716.814
b. NPV=	Sum of discounted CF=	307826.96