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. 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 rate is 21 percent and the required return on the project is 12 percent. a. What are the net cash flows of the project each year? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the NPV of the project?(A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

Answer 1

Solution :

a. The net cash flows of the project each year are as follows :

Year 0 = Initial Fixed Asset Investment + Initial Investment in Net Working Capital

= - $ 2,300,000 - $ 186,000 = - $ 2,486,000

Year 1 : Net cash Inflow = $ 943,100

Year 2 : Net cash Infow = $ 943,100

Year 3 : Net cash Inflow + Net Working capital Investment Recouped + After Tax Salvage value

= $ 943,100 + $ 186,000 + $ 174,590

= $ 1,303,690

b. The NPV of the project is = $ 35,827.91

= $ 35,828 ( when rounded off to the nearest whole number )

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.