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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 $2,290,000 in annual sales, with costs of $1,310,000. Assume the tax rate is 21 percent and the required return on the project is 10 percent.

What is the project’s NPV?

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Expert Solution

Time line 0 1 2 3
Cost of new machine -2350000
=Initial Investment outlay -2350000
100.00%
Sales 2290000 2290000 2290000
Profits Sales-variable cost 980000 980000 980000
-Depreciation Cost of equipment/no. of years -783333.3 -783333.3 -783333.3 0 =Salvage Value
=Pretax cash flows 196666.67 196666.67 196666.67
-taxes =(Pretax cash flows)*(1-tax) 155366.67 155366.67 155366.67
+Depreciation 783333.33 783333.33 783333.33
=after tax operating cash flow 938700.00 938700.00 938700
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
Total Cash flow for the period -2350000 938700 938700 938700
Discount factor= (1+discount rate)^corresponding period 1 1.1 1.21 1.331
Discounted CF= Cashflow/discount factor -2350000 853363.64 775785.12 705259.2
NPV= Sum of discounted CF= -15592.04

jeff jeffy answered 3 weeks ago
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