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1 February, 20:32

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

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  1. 1 February, 20:40
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    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
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