Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,300,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,650,000 in annual sales, with costs of $1,670,000. Assume the tax rate is 22 percent and the required return on the project is 12 percent. What is the project’s NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

	year	0	1	2	3
A	initial investment	(2,300,000.00)
	operating cash flow
i	sales		2,650,000.00	2,650,000.00	2,650,000.00
ii	Expenses		1,670,000.00	1,670,000.00	1,670,000.00
iii	depreciation		766,666.67	766,666.67	766,666.67
iv=i-ii-iii	Profit before tax		213,333.33	213,333.33	213,333.33
v=iv*22%	Tax@ 22%		46,933.33	46,933.33	46,933.33
vi=iv-v	Profit after tax		166,400.00	166,400.00	166,400.00
B=vi+iii	operating cash flow		933,066.67	933,066.67	933,066.67
C=A+B	Net cash flow	(2,300,000.00)	933,066.67	933,066.67	933,066.67
D	PVIF @ 12%	1.0000	0.8929	0.7972	0.7118
E=C*D	present value	(2,300,000.00)	833,095.24	743,835.03	664,138.42	(58,931.30)
	Therefore NPV =	(58,931.30)