DM 363 Bu SECTIONS instructions help Chapter 9 Homework Quesnon 6(0[ 6] 6 1000 p
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DM 363 Bu SECTIONS instructions help Chapter 9 Homework Quesnon 6(0[ 6] 6 1000 points Problem 9-10 Calculating Project NPV ILO 2 t investment of 2,550,000 The fxed asset wil be depreciated straight-Ine to zero over its three-year tax life, after which tme it well be worthless The H Cochran, Inc, is considering a new three-year expansion project that requires an initial toxed asset project is estmated to generate $2,300,000 n annual sales, with costs of $1.290,000 Assume the tax rale is 35 percent and the requred return on the project is 7 percent What is the projects NPV? IA negative answer should be indicated by a minus sign Enter your answer in dollars, n 32.16.) ot millions of dollars, e g 1,234 567. Do not round intermediate calculations and round your answer to 2 decimal places, c.o Net present value $ References eBook & Resources Worksheet ng Objective.09-02 Analyze a projacts projected Problem 9-10 Calculating Project NPV LO 21 cash flows 2/8/2017Explanation / Answer
Solution:
First of all, we need to calcualte Operating Cash Flow (OCF) which is given by:
OCF = (Sales - Cost) (1- Tax Rate) + Depriciation (Tax Rate)
Here, Sales = $2,300,000, Cost = $1,290,000, Tax = 35%, Depriciation = $2,550,000/3 = $850,000
OCF = ($2,300,000 - $1,290,000) (1-0.35) + ($850,000)(0.35)
OCF=$1,010,000(0.65) + $297,500
OCF = $954,000
Now, we can calculate the Net Present Value as the sum of Initial Investment (i.e. -$2,550,000) and the Present Value of Operating Cash flows over 3 years.
To calculate PV of OCF's, we should use PVIFA7,3 as 7% is the Reqd Rate of Return and Time is 3 years.
Here, PVIFA = 2.6243
So, NPV = -$2,550,000 + $954,000 (PVIFA7,3)
NPV = -$2,550,000 + $954,000 (2.6243)
NPV = -$46471.80
Remember to enter minus sign along with two decimal places in the answer space provided (-46471.80).
Hope it helps !
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