Question

an initial fixed asset a new three-year expansion project that requires Cochrane, Inc., is considering 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 $2,270,000 in annual sales, with costs of $1,260,000. The project requires an initial investment in net working capital of $162,000, and the fixed asset will have a market value of $187,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 8 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).) Cash Flow Year 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

Answer 1

Years	Cash Flow
Project's year 0 net cash flow	-$2,622,000
Project's year 1 net cash flow	$943,500
Project's year 2 net cash flow	$943,500
Project's year 3 net cash flow	$1,227,050

Calculate of Annual Cash Flow

Annual Sales	$2,270,000
Less : Costs	$1,260,000
Less: Depreciation [$2,460,00 / 3 Years]	$820,000
Net Income Before Tax	$190,000
Less : Tax at 35%	$66,500
Net Income After Tax	$123,500
Add Back : Depreciation	$820,000
Annual Cash Flow	$943,500

Year 0 Cash outflow

Year 0 Cash outflow = Initial Investment + Working Capital

= -$2,460,000 - $162,000

= -$2,622,000

Year 1 Cash Flow = $943,500

Year 2 Cash Flow = $943,500

Year 3 Cash Flow = Annual Cash flow + Working Capital + Market Value after tax

= $943,500 + $162,000 + [$187,000 x (1 – 0.35)]

= $943,500 + $162,000 + $121,550

= $1,227,050

(b)-Net Present Value (NPV) of the Project at 8% discount rate

Year	Annual Cash Inflow ($)	Present Value factor at 8%	Present Value of Annual Cash Inflow ($)
1	943,500	0.92592593	873,611.11
2	943,500	0.85733882	808,899.18
3	1,227,050	0.79383224	974,071.85
TOTAL			2,656,582.14

Net Present Value = Present value of annual cash inflows – Initial investment cost

= $2,656,582.14 - $2,622,000

= $34,582.14

NOTE

The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.