Question

Cochran Inc is considering a new three-year expansion project that requires an intial fixed investment of 1,500,000. The equipment will be depreciated using the 5 years MACRS and will be sold at the end of the project for $170,000. The project will generate $900,000 in annual sales and generate costs of $160,000. The project will require an additional investment of $75,000 in Net Working Capital. The tax rate for the project is 20 percent and the required return is 16 percent.

What is the NPV of the project?

Answer 1

	MARC depreciation
	Year	1	2	3
	Rate	33.33%	44.45%	14.81%
	Depreciation	499950	666750	222150
	Post tax salvage value
	Book value =	111150
	Sales price	170000
	Gain on sale	58850
	Tax on gain	11770
	Post tax salvage value	158230
	Computation of NPV
	year	0	1	2	3
	Initial investment	(1,500,000)
	Working capital	(75,000)			75,000
	Operating cash flow
	Incremental contribution (900000-160000)		740,000	740,000	740,000
	depreciation		499,950.00	666,750.00	222,150.00
	Profit before tax		240,050.00	73,250.00	517,850.00
	Tax @ 20%		48,010.00	14,650.00	103,570.00
	Net income		192,040.00	58,600.00	414,280.00
	Operating cash flow(income+dep)		691,990.00	725,350.00	636,430.00
	Post tax salvage value				158230
	Net cash flow	(1,575,000.00)	691,990.00	725,350.00	869,660.00
	PVIF @ 16%	1	0.862068966	0.743162901	0.640657674
	Present value	(1,575,000.00)	596,543.10	539,053.21	557,154.35	117,750.67
	NPV =	117,750.67