Question

H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,180,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1.730,000 in annual sales, with costs of $636.000. The project requires an initial investment in net working capital of $290,000, and the fixed asset will have a market value of $240,000 at the end of the project a. If the tax rate is 24 percent, what is the project's Year 0 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 12 percent, what is the project's NPV? (Do not round Intermediate calculations and round your answer to two decimeal places, e.g., 32.16.) Year 0 cash flow а. Year 1 cash flow Year 2 cash flow Year 3 cash flow b. NPV

Answer 1

Time line		0	1	2	3
Cost of new machine		-2180000
Initial working capital		-290000
=Initial Investment outlay		-2470000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Sales			1730000	1730000	1730000
Profits	Sales-variable cost		1094000	1094000	1094000
-Depreciation	=Cost of machine*MACR%		-726594	-969010	-322858	161538	=Salvage Value
=Pretax cash flows			367406	124990	771142
-taxes	=(Pretax cash flows)*(1-tax)		279228.56	94992.4	586067.92
+Depreciation			726594	969010	322858
=after tax operating cash flow			1005822.56	1064002.40	908925.92
reversal of working capital					290000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				182400
+Tax shield on salvage book value	=Salvage value * tax rate				38769.12
=Terminal year after tax cash flows					511169.12
a. Total Cash flow for the period		-2470000	1005822.56	1064002.40	1420095.040
Discount factor=	(1+discount rate)^corresponding period	1	1.12	1.2544	1.404928
Discounted CF=	Cashflow/discount factor	-2470000	898055.8571	848216.199	1010795.599
b. NPV=	Sum of discounted CF=	287067.66