Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,460,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,960,000 in annual sales, with costs of $1,970,000. The project requires an initial investment in net working capital of $154,000 and the fixed asset will have a market value of $189,000 at the end of the project. Assume that the tax rate is 22 percent and the required return on the project is 9 percent. a. What are the net cash flows of the project each year? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

less: less: after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale $2,960,000.00 $1,970,000.00 $820,000.00 $170,000.00 $37,400.00 $189,000.00 $0.00 $189,000.00 $2,960,000.00 $1,970,000.00 $820,000.00 $170,000.00 $37,400.00 $132,600.00 $820,000.00 $952,600.00 less: $2,960,000.00 $1,970,000.00 $820,000.00 $170,000.00 $37,400.00 $132,600.00 $820,000.00 $952,600.00 add: salvage value less: tax on gain after tax salvage value calvage value $189,000.00 $41,580.00 $147,420.00 $820,000.00 $952,600.00 YEAR annual sales costs depreciation EBT tax @22% EAT depreciation OCF initial investment: plant -$2,460,000.00 working capital -$154,000.00 after tax salvage value: plant Cash flows -$2,614,000.00 pv @ 9% 1 PRESENT VALUE -$2,614,000.00 NPV $30,062.84 $154,000.00 $952,600.00 0.91743 $873,944.95 $952,600.00 0.84168 $801,784.36 $147,420.00 $1,254,020.00 0.77218 $968,333.53 year 0 year 1 year 2 year 3 NPV $2,614,000 $952,600 $952,600 $1,254,020 $30,062.84 b)