Problem 9-12 NPV and Modified ACRS [LO 2] Cochrane, Inc., is considering a new t

Question

Problem 9-12 NPV and Modified ACRS [LO 2]

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,490,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,280,000 in annual sales, with costs of $1,270,000. The project requires an initial investment in net working capital of $163,000, and the fixed asset will have a market value of $188,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 8 percent.

What is the net cash flow of the project for the following years?

What is the NPV of the project?

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,490,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,280,000 in annual sales, with costs of $1,270,000. The project requires an initial investment in net working capital of $163,000, and the fixed asset will have a market value of $188,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 8 percent.

Explanation / Answer

Calculation of cash outflow Yr PVF Amount PV Cost of Machine 0 1 2490000 2490000 Add: Working Captal 0 1 163000 163000 Less: Reversal of WC 3 0.793832 163000 129394.7 Less: Terminal Value(1- tax rate) 3 0.793832 131600 104468.3 PV of cash outflow 2419137 Calculation of cash inflow Yr1 Yr2 Yr3 Sales 2280000 2280000 2280000 Less: Cost 1270000 1270000 1270000 Less: Dep 830000 830000 830000 [2490000/3yr] PBT 180000 180000 180000 Less: Tax 54000 54000 54000 PAT 126000 126000 126000 Add: Dep 830000 830000 830000 CFAT 956000 956000 956000 PVF @ 8% 0.925925926 0.857339 0.793832 PV of CFAt 885185.1852 819615.9 758903.6 pV of cash inflow 2463705 NPV= PVCI-PVCO =2463705-2419137 44568 $

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