Question

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.37 million. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,240,000 in annual sales, with costs of $1,230,000. The project requires an initial investment in net working capital of $159,000, and the fixed asset will have a market value of $184,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 9 percent.

Requirement 1:

What is the net cash flow of the project for the following years? (Do not include the dollar signs ($).Negative amounts should be indicated by a minus sign.Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).Round your answers to 2 decimal places (e.g., 32.16).)

Year	Cash Flow
0
1
2
3

Requirement 2:

What is the NPV of the project? (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).)

Answer 1

Calculation of depreciation:

Cost of machine=2370000

Salvage value =184000

Depreciation=2370000-184000/3

=728666.67

Calculation of cash outflows:

Total Investment =intial investment + working capital

=2370000+159000

=2529000.

Calculation of cash inflows @9%:

Particulars	year-1	year-2	year-3
Sales	2240000	2240000	2240000
(-)op cost	1230000	1230000	1230000
Inflows	1010000	1010000	1010000
(+)salvage value	0	0	184000
(-)depreciation	728666.67	728666.67	728666.67
Gross inflows	281333.33	281333.33	465333.33
(-)Tax@35%	98466.67	98466.67	162866.67
Net inflows	182866.66	182866.66	302466.66
(+)depreciation	728666.67	728666.67	728666.67
Cash inflows	911533.33	911533.33	1031133.33

Note: In the final we get working capital so we add back this amount to cash inflows.

Calculation of present value of cash inflows :

Year	cash inflows	p.v.f	p.v cash inflows
1	911533.33	0.917	835876.06
2	911533.33	0842	767511.06
3	1190133.33 (1031133.33+159000)	0.772	918782.93

Total p.v of cash inflows =2522170.05.

Calculation of NPV:

NPV=p.v of cash inflows -p.v of cash outflows

=2522170.05-2529000

=-6829.95 i.e -6830.

Therefore NPV is negative so it is better to not invest in present project.