Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.15 million. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2.23 million in annual sales, with costs of $1.25 million. The project requires an initial investment in net working capital of $150,00O, and the fixed asset will have a market value of $185,000 at the end of the project. Assume that the tax rate is 23 percent and the required return on the project is 14 percent. : a. What is the net cash flow of the project for each year? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) 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.) Year 0 cash flow a. Year 1 cash flow Year 2 cash flow Year 3 cash flow NPV MACRS Table Property Class Year 3-Year 5-Year 7-Year 1 33.33% 20.00% 14.29% 2 44.45 32.00 24.49 14.81 19.20 17.49 7.41 11.52 12.49 4 8.93 11.52 6 5.76 8.92 7 8.93 4.46

Answer 1

less: less: after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale $185,000.00 $159,315.00 $25,685.00 less: $2,230,000.00 $1,250,000.00 $716,595.00 $263,405.00 $60,583.15 $202,821.85 $716,595.00 $919,416.85 $2,230,000.00 $1,250,000.00 $955,675.00 $24,325.00 $5,594.75 $18,730.25 $955,675.00 $974,405.25 $2,230,000.00 $1,250,000.00 $318,415.00 $661,585.00 $152,164.55 $509,420.45 $318,415.00 $827,835.45 add: salvage value less: tax on gain after tax salvage value $185,000.00 $5,907.55 $179,092.45 YEAR annual sales costs depreciation EBT tax @23% EAT depreciation OCF initial investment: plant working capital after tax salvage value: plant Cash flows pv @ 14% PRESENT VALUE NPV $2,150,000.00 $150,000.00 $150,000.00 -$2,300,000.00 $919,416.85 0.87719 $806,506.01 1 $179,092.45 $1,156,927.90 0.67497 $780,893.38 $974,405.25 0.76947 $749,773.20 -$2,300,000.00 $37,172.59 a) year 0 year 1 year 2 year 3 b) NPV -$2,300,000 $919,416.85 $974,405.25 $1,156,927.90 $37,172.59