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Cocharen inc. is considering a new three-year expansion project that requires an initial fixed asset investment...

Cocharen inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $2,160,000. The fixed assets will be depreciated with bonus depreciation. At the end of the project's three-year life, the fixed asset is expected to be worthless. The project is estimated to generate $2,170,000 in annual sales, with operating costs of $1,160,000 per year. The firm's tax rate is 21% and the required return on the project is 11%. What is the project's payback period?

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Expert Solution

Calculation of cash flows
Year 0 Year 1 Year 2 Year 3
Initial investment -2160000 - - -
Sales - 2170000.00 2170000.00 2170000.00
Less : Operating cost - -1160000.00 -1160000.00 -1160000.00
Less : Bonus depreciation allowed - -2160000.00 0.00 0.00
in year 1 ___________ _____________________________________
Annual Profit - -1150000.00 1010000.00 1010000.00
Less : Tax 21% 241500.00 -212100.00 -212100.00
___________ _____________________________________
Profits after tax -885000.00 797900.00 797900.00
Add : Depreciation (non-cash exp.)
(considered only for tax Purpose, so added back) 2160000.00 - -
___________ _____________________________________
Cash flow -2160000 1275000.00 797900.00 797900.00
Cumulative cash flows -2160000 -885000.00 -87100.00 710800.00
______________________________________________
Payback period is period ot time, at which full value of investment is recovered.
Payback formula = Year in which cum. Cash flow become positive - (Cumulative cash flow of that year / Cash flow of that year
4 Years - (710800/797900)
3.109161549
So, payback period of project is 3.11 Years.

jeff jeffy answered 1 year ago
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