Question
In: Finance
Cochran Inc. is considering a new three-year expansion project that requires an initial fixed asset investment...
Cochran Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $1,950,000. 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 $2,145,000 in annual sales, which costs $1,205,000. If the tax rate is 35%, , OCF is $838,500.Calculate the NPV using the required return of 14% using the cash flows from the previous problem. And Do some sensitivity analysis. Suppose the president lowered the tax rate to 30%. Calculate the NPV again using a 14% required return.
Solutions
Expert Solution
Net present Value (NPV) calculation:
| Year (t) | Initial investment | Depreciation amount (D) (Initial investment/3) | Annual sales | Annual cost | Before tax cash inflow (CF) | Taxable Income (CF - depreciation) | Income taxes (Taxable Income *35%) | Operating cash flow (OCF) (taxable income - taxes + depreciation) | PV of Net cash flow @14%= NCF/ (1+14%)^t |
| 0 | $1,950,000 | -$1,950,000 | -$1,950,000.00 | ||||||
| 1 | $650,000 | $2,145,000 | $1,205,000 | $940,000 | $290,000 | $101,500 | $838,500 | $735,526.32 | |
| 2 | $650,000 | $2,145,000 | $1,205,000 | $940,000 | $290,000 | $101,500 | $838,500 | $645,198.52 | |
| 3 | $650,000 | $2,145,000 | $1,205,000 | $940,000 | $290,000 | $101,500 | $838,500 | $565,963.62 | |
| NPV | -$3,311.55 |
Net present Value (NPV) of project at 35% tax rate is -$3,311.55. As the NPV is negative so the project is not acceptable.
NPV calculation at 30% tax rate:
| Year (t) | Initial investment | Depreciation amount (D) (Initial investment/3) | Annual sales | Annual cost | Before tax cash inflow (CF) | Taxable Income (CF - depreciation) | Income taxes (Taxable Income *30%) | Operating cash flow (OCF) (taxable income - taxes + depreciation) | PV of Net cash flow @14%= NCF/ (1+14%)^t |
| 0 | $1,950,000 | -$1,950,000 | -$1,950,000.00 | ||||||
| 1 | $650,000 | $2,145,000 | $1,205,000 | $940,000 | $290,000 | $87,000 | $853,000 | $748,245.61 | |
| 2 | $650,000 | $2,145,000 | $1,205,000 | $940,000 | $290,000 | $87,000 | $853,000 | $656,355.80 | |
| 3 | $650,000 | $2,145,000 | $1,205,000 | $940,000 | $290,000 | $87,000 | $853,000 | $575,750.70 | |
| NPV | $30,352.12 |
NPV of the project at 30% tax rate is $30,352.12. As the NPV is positive therefore project is acceptable.
Formulas used in excel calculation:
jeff jeffy answered 6 months agoRelated Solutions
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset...
H. Cochran, Inc., is considering a new three-year expansion
project that requires an initial fixed asset investment of $2.15
million. 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 $2.23 million in
annual sales, with costs of $1.25 million. If the tax rate is 23
percent, what is the OCF for this project? (Do not round
intermediate calculations and round your answer...
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset...
H. Cochran, Inc., is considering a new three-year expansion
project that requires an initial fixed asset investment of
$2,350,000. 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 $3,310,000 in
annual sales, with costs of $2,330,000. Assume the tax rate is 23
percent and the required return on the project is 11 percent. What
is the project’s NPV?
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset...
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. The project is estimated to
generate $2,900,000 in annual sales, with costs of $1,910,000. The
project requires an initial investment in net working capital of
$186,000 and the fixed asset will have a market value of $221,000
at the end of the project. Assume that the tax...
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset...
H. Cochran, Inc., is considering a new three-year expansion
project that requires an initial fixed asset investment of
$2,350,000. The fixed asset will be depreciated straight-line to
zero over its three-year tax life. The project is estimated to
generate $2,470,000 in annual sales, with costs of $1,490,000. The
project requires an initial investment in net working capital of
$162,000 and the fixed asset will have a market value of $197,000
at the end of the project. Assume that the tax...
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset...
H. Cochran, Inc., is considering a new three-year expansion
project that requires an initial fixed asset investment of
$2,350,000. The fixed asset will be depreciated straight-line to
zero over its three-year tax life. The project is estimated to
generate $2,470,000 in annual sales, with costs of $1,490,000. The
project requires an initial investment in net working capital of
$162,000 and the fixed asset will have a market value of $197,000
at the end of the project. Assume that the tax...
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset...
H. Cochran, Inc., is considering a new three-year expansion
project that requires an initial fixed asset investment of
$2,400,000. The fixed asset will be depreciated straight-line to
zero over its three-year tax life. The project is estimated to
generate $3,030,000 in annual sales, with costs of $2,030,000. The
project requires an initial investment in net working capital of
$168,000 and the fixed asset will have a market value of $203,000
at the end of the project. Assume that the tax...
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset...
H. Cochran, Inc., is considering a new three-year expansion
project that requires an initial fixed asset investment of $2.15
million. The fixed asset qualifies for 100 percent bonus
depreciation. The project is estimated to generate $2.23 million in
annual sales, with costs of $1.25 million. The project requires an
initial investment in net working capital of $150,000, and the
fixed asset will have a market value of $185,000 at the end of the
project. Assume that the tax rate is...
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset...
H. Cochran, Inc., is considering a new three-year expansion
project that requires an initial fixed asset investment of $2.15
million. 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 $2.23 million in
annual sales, with costs of $1.25 million. The project requires an
initial investment in net working capital of $150,000, and the
fixed asset will have a market value of $185,000...
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset...
H. Cochran, Inc., is considering a new three-year expansion
project that requires an initial fixed asset investment of $2.15
million. The fixed asset falls into the three-year MACRS class
(MACRS Table). The project is estimated to generate $2.23 million
in annual sales, with costs of $1.25 million. The project requires
an initial investment in net working capital of $150,000, and the
fixed asset will have a market value of $185,000 at the end of the
project. Assume that the tax...
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset...
H. Cochran, Inc., is considering a new three-year expansion
project that requires an initial fixed asset investment of
$2,610,000. The fixed asset falls into the three-year MACRS class
(MACRS Table). The project is estimated to generate $2,320,000 in
annual sales, with costs of $1,310,000. The project requires an
initial investment in net working capital of $167,000, and the
fixed asset will have a market value of $192,000 at the end of the
project. Assume that the tax rate is 40...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to grow at...
- 7. In order to improve the network performance and security, ACLs is recommended. Please explain what...
- Noting that there has been an increasing interest in organic foodstuffs with increasing affluence, Mr Tommy...
- 1. the physical sites at which crossing over occurs are the.... A. chiasmata B. Centrioles C....
- Develop a Java program that determines the gross pay for an employee. The company pays hourly...
- Discuss the four evolving company orientations. Which orientation is considered most successful and why?
- Flexible Budgeting and Variance Analysis I Love My Chocolate Company makes dark chocolate and light chocolate....
ADVERTISEMENT