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

1: Net Cash flows as follows

Year	Initial cash flow	OCF	Working capital	Salvage	Net cash flows
0	-2370000		-159000		-2529000
1		$932,972.35			932972.35
2		$1,025,212.75			1025212.75
3		$779,348.95	159000	181065.95	1119414.9

2: NPV = $54232.69

WORKINGS

INPUTS
Initial cost	2370000
Tax rate	35%
Selling price	184000
Working capital	159000
MARR	9%
Annual cash flow =2240000-1230000	1010000

Operating Cash flows

Year	Depreciation rate	OCF		MACRS 3 year
1	33.33%	Year	Cash flows	Depreciation	EBIT	Tax	PAT	OCF
2	44.45%	1	1010000	-789921	220079	-77027.65	143051.35	932972.35
3	14.81%	2	1010000	-1053465	-43465	15212.75	-28252.25	1025212.75
		3	1010000	-350997	659003	-230651.05	428351.95	779348.95

Salvage value of machine

Salvage
Purchase price	2370000
Less: Depreciation	-2194383
Closing book value	175617
Selling price	184000
Gain/(loss)	8383
Tax/ Saving	-2934.05
Net salvage	181065.95