Question

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,610,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,320,000 in annual sales, with costs of $1,300,000. 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 percent and the required return on the project is 6 percent.

Requirement 1:

What are the net cash flows of the project for the following years? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).)

Year	Cash Flow
0	$
1
2
3

Requirement 2:

What is the NPV of the project?

Answer 1

Solution - Requirement 1
Cashflow for Year	Amount
Y0	$(2,777,000.00)
Y1	$     960,000.00
Y2	$     960,000.00
Y3	$ 1,242,200.00		(Y3 includes the realization of initial investment of working capital)
Solution - Requirement 2
Cashflow for Year	PVF@6%	Amount	PV	NPV
Y0		$ (2,777,000.00)	$               (2,777,000.00)
Y1	0.943396226	$      960,000.00	$                    905,660.38
Y2	0.88999644	$      960,000.00	$                    854,396.58
Y3	0.839619283	$ 1,242,200.00	$                1,042,975.07	$                      26,032.03

Working Notes
				Depritiation Per annum for tax life
Initial Investment	Fixed Assets		$             (2,610,000.00)	$                 (870,000.00)
	Working Capital		$                 (167,000.00)
			Year 1	Year 2	Year 3
Annual Sales			$               2,320,000.00	$               2,320,000.00	$               2,320,000.00
Less : Annual Cost of Sales			$             (1,300,000.00)	$             (1,300,000.00)	$             (1,300,000.00)
Add : Sale of Initial Fixed Assets at Year 3					$                   192,000.00
Profit			$               1,020,000.00	$               1,020,000.00	$               1,212,000.00
Less : Depritiaion			$                 (870,000.00)	$                 (870,000.00)	$                 (870,000.00)
Profit Before Tax			$                   150,000.00	$                   150,000.00	$                   342,000.00
Less : Tax @40%			$                   (60,000.00)	$                   (60,000.00)	$                 (136,800.00)
Profit After Tax			$                     90,000.00	$                     90,000.00	$                   205,200.00
Add : Depritiation			$                   870,000.00	$                   870,000.00	$                   870,000.00
Cash Flow for the year			$                   960,000.00	$                   960,000.00	$               1,075,200.00