1 answer

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

Question:

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,480

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,480,000. 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 $3,430,000 in annual sales, with costs of $2,450,000. Assume the tax rate is 25 percent and the required return on the project is 9 percent. What is the project's NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net present value

Answers

Annual depreciation=(Cost-Salvage value)/Useful Life

=(2,480,000/3)=826666.667

OCF=(Sales-Costs)(1-tax rate)+Tax savings on Annual depreciation

=(3,430,000-2,450,000)(1-0.25)+(0.25*826666.667)

=941666.667

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=941666.667[1-(1.09)^-3]/0.09

=941666.667*2.53129467

=2383635.81

NPV=Present value of inflows-Present value of outflows

=2383635.81-2,480,000

=($96364.19)(Approx)(Negative).

.

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