H. Cochran, Inc., is considering a new three-year expansion project that require

Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,580,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,310,000 in annual sales, with costs of $1,300,000. The project requires an initial investment in net working capital of $166,000, and the fixed asset will have a market value of $191,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 7 percent.

What are the net cash flows of the project each year? (A negative answer should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

Year/Cash Flow

Years: 0, 1, 2, 3

What is the NPV of the project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Depreciation = Purchase cost / useful life

            = 2580000/3

            = $ 860000

1)

3

***

**

After tax sale value = 191000[1-.30]= 133700

Terminal value at year3 = After tax sale value+ working capitALA RELEASED

              = 133700+ 166000

                = 465700

Cash flow for year3 = 465700+965000 = 1430700

2)NPV = Initial cost + [PVF7%,1*CF1]+[PVF 7%,2*CF2]+[PVF 7%,3*CF3]

= -2746000+ [.93458*965000]+[.87344*965000]+[.81630*1430700]

= -2746000+ 901869.7+ 842869.6+ 1167880.41

= 166619.71

**FInd present value factor and annuity factor from table respectively.

3

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