Question

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?

Answer 1

NPV :
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Dep = [ Cost - Salvage Value ] / Life

= [ 2350000 - 0 ] / 3

= 2350000/3

= 783333.33

Year	Sales	Cost	Dep	PBT	Tax	PAT	CF	PVF @11%	Disc CF
0							$ -23,50,000.00	1.0000	$ -23,50,000.00
1	$ 33,10,000.00	$ 23,30,000.00	$ 7,83,333.33	$ 1,96,666.67	$ 45,233.33	$ 1,51,433.34	$     9,34,766.67	0.9009	$     8,42,132.13
2	$ 33,10,000.00	$ 23,30,000.00	$ 7,83,333.33	$ 1,96,666.67	$ 45,233.33	$ 1,51,433.34	$     9,34,766.67	0.8116	$     7,58,677.60
3	$ 33,10,000.00	$ 23,30,000.00	$ 7,83,333.33	$ 1,96,666.67	$ 45,233.33	$ 1,51,433.34	$     9,34,766.67	0.7312	$     6,83,493.33
NPV	$      -65,696.94

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