Question

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.67 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 $2,340,000 in annual sales, with costs of $1,330,000. Assume the tax rate is 30 percent and the required return on the project is 6 percent.

Required:

What is the project’s NPV? (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).)

****This is the third time Ive asked for this question and the last two have been incorrect. Please make sure it is correct, if you aren't sure please let me know. Thanks

Answer 1

	Machine A	0	1	2	3
	Initial Investment	-2,670,000
	Revneue		2,340,000	2,340,000	2,340,000
minus	Operating Costs		1,330,000	1,330,000	1,330,000
minus	Depreciation		890000	890000	890000	Depreciation = (Initial investment-0)/3
	EBIT		120,000	120,000	120,000
	Taxes		36,000	36,000	36,000	Taxes = EBIT* Tax rate
	EAT= EBIT - Taxes		84,000	84,000	84,000
	Depreciation		890,000	890,000	890,000
	Free cash flow		974,000	974,000	974,000
	Discvount Rate	0.06
	NPV	-66,486.36	using NPV function = NPV ( Discount rate, Cash flows from year 1-3) - Initial Investment

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