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

Question

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 $2.1 million. 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 $2,150,000 in annual sales, with costs of $1,140,000. Assume the tax rate is 35 percent and the required return on the project is 14 percent. WHAT IS THE PROJECTS NPV?

Answers

NPV is difference between Present value of cash inflow and Present value of cash outflow .

We have Present value of cash outflow = $2,100,000 .

Present value of cash inflow = ?

so we have to calculate Present value of Cash infow.

PV of Cash inflow = Operating cashflow/ (1+R)^t

OCF = (Sales – Costs)(1 – T) + Depreciation(T)

OCF = ($2,150,000 – 1,140,000)(1 – 0.35) + 0.35($2,100,000/3)

OCF = $901,500

So now NPV =[ 901500/(1+.14)^3 ] - 2,100,000

NPV = –$7,048.73


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