Question

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. 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 $1,950,000 in annual sales, with costs of $1,060,000. Assume the tax rate is 35 percent and the required return on the project is 14 percent.

Required:

What is the project’s NPV?

Answer 1

Statement showing Cash flows
Particulars	Time	PVf 14%	Amount	PV
Cash Outflows	-	1.00	(1,860,000.00)	(1,860,000.00)
PV of Cash outflows = PVCO				(1,860,000.00)
Cash inflows	1.00	0.8772	795,500.00	697,807.02
Cash inflows	2.00	0.7695	795,500.00	612,111.42
Cash inflows	3.00	0.6750	795,500.00	536,939.84
PV of Cash Inflows =PVCI				1,846,858.28
NPV= PVCI - PVCO				(13,141.72)
Annual sales	1,950,000.00
Costs	(1,060,000.00)
Depreciation = 1860,000/3	(620,000.00)
Income before tax	270,000.00
Tax at 35%	(94,500.00)
Income after tax	175,500.00
Add Depreciation	620,000.00
Cash flow after tax	795,500.00