Question

H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,380,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,805,000 in annual sales, with costs of $696,000. The project requires an initial investment in net working capital of $440,000, and the fixed asset will have a market value of $465,000 at the end of the project.
a. If the tax rate is 24 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to two decimal places, e.g., 32.16.)

b. If the required return is 11 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16.)

Answer 1

Answer: If the required return is 11 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16.)

Explanation:

Answer 2

Answer:

The cash flows for the relevant years as follows:

Year 0=-$2380000

Year 1=$1,033,220.96  

Year 2=$1,096,738.40  

Year 3 =$1,763,160.64  

However,using a discount factor of 11% ,the present values  of each year cash flows are :

Cash flows (2,820,000.00)  1,033,220.96   1,096,738.40 1,763,160.64  

DF                 1                        1.11                    1.23                  1.37

DCF     (2,820,000.00)  930,829.69   890,137.49   1,289,207.86  

The net discounted cash flow by adding up the DCFs gives $ 290,175.05  

Explanation:

The detailed computation is found in the attached Excel file.

Download xlsx