Question

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,300,000. 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 $2,410,000 in annual sales, with costs of $1,430,000. Assume the tax rate is 23 percent and the required return on the project is 12 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.)

Answer 1

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

=(2,300,000/3)=$766,666.67(Approx).

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

which is equal to

=(2,410,000-1,430,000)(1-0.23)+(0.23*766,666.67)

=930,933.33(Approx).

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

=930,933.33[1-(1.12)^-3]/0.12

=930,933.33*2.401831268

=$2,235,944.79(Approx).

NPV=Present value of inflows-Present value of outflows

=$2,235,944.79-$2,300,000

which is equal to

=($64055.21)(Approx)(Negative).