Question

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

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

Homework Answers

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

Please discuss in case incorrect. Please rate well.
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