Problem 9-12 NPV and Modified ACRS [LO 2] Cochrane, Inc., is considering a new t
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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? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567). Round your answers to 2decimal places (e.g., 32.16).)
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 MACR Depreciation using 200% Delcining Balance Method-
Book Value of assets at end of Year 3 = $785601.83
Market/Realizable Value of Assets at end of year 3= $188000
Loss on Sale of Assets = $785601.83 - $188000 = $597601.83
Tax Saving on Loss = $597601.83*30% = $179280.55
Total Inflow from Assets at end of Project = 188000+179280.55 = $367280.55
Year 1 Year 2 Year 3 Opening Balance $2,490,000.00 $1,660,083.00 $922,176.11 Depreciation Rate 33.33% 44.45% 14.81% Depreciatiion $829,917.00 $737,906.89 $136,574.28 Closing WDV $1,660,083.00 $922,176.11 $785,601.83Related Questions
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