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Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment...

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,310,000. The machine falls into the 3-year MACRS class. The project is estimated to generate $2,220,000 in annual sales, with costs of $1,210,000 per year. The project requires an initial investment in net working capital of $157,000. The fixed assets are expected to be sold for $182,000 at the end of the project. The firm's tax rate is 21% and the required return of the project is 11%. What is the projects NPV?

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Year 0 1 2 3 Total
Purchase of fixed asset -2310000
Investment in working capital -157000
Revenue 2220000 2220000 2220000
less:cost (1210000) (1210000) (1210000)
Depreciation (769923)    [2310000*.3333) (1026795)    [2310000*.4445) (342111) [2310000*.1481)
Income before tax 240077 (16795) 667889
less:tax (50416.17) [240077*.21] 3526.95 (140256.69)
Income after tax 189660.83 (13268.05) 527632.31
Add:depreciation 769923 1026795 342111
Cash flow 959583.83 1013526.95 869743.31
After tax sale value 179725.91
working capital released 157000
Total cash flow -2467000 959583.83 1013526.95 1206469.22
PVF11% 1 .90090 .81162 .73119
NPV = (Total cash flow *PVF) -2467000 864489.07 822598.74 882158.23 102246.04

NPV : 102246.04

**Book value at end of year 3 = 2310000*.0741=171171

Gain = 182000-171171 =10829

Tax on gain = 10829 *.21= 2274.09

After tax sale value = 182000-2274.09 = 179725.91

**FInd present value factor from table or or using the formula 1/(1+i)^n

jeff jeffy answered 1 year ago
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