Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,220,000. 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 $2,190,000 in annual sales, with costs of $1,180,000. Assume the tax rate is 30 percent and the required return on the project is 13 percent. What is the project’s NPV? (A negative answer should be indicated by a minus sign. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net present value

Answer 1

Answer:

Net present value = -$26,489.24 to 2 decimal places

Explanation:

In this question, we are tasked with calculating the net present value of the project.

We proceed as follows;

The following parameters are identified from the question;

Initial fixed asset investment = $2,220,000

Annual depreciation = Initial fixed asset investment/years of tax life =  2,220,000 / 3 = $740,000

Operating cash flow = ( sales - costs - depreciation)( 1 - tax rate) + depreciation

Operating cash flow = ( 2,190,000 - 1,180,000 - 740,000)( 1 - 0.3) + 740,000  = $929,000

Net present value = present value of cash outflows - present value of cash inflows

Net present value = -2,220,000 + [929,000 / ( 1 + 0.13)^1]+ [929,000 / ( 1 + 0.13)^2 ]+ [929,000 / ( 1 + 0.13)^3 ]}

= -2,220,000 + (822,123.894 + 727,543.269 + 643,843.601) =

-$26,489.236

Which is -$26,489.24 to 2 decimal places