Cash flows and NPV problem?

PLEASE help!! I got the other 10 quiz problems correct, but I cant get this one, and my final grade is riding on it.

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.31 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 $2,220,000 in annual sales, with costs of $1,210,000. The project requires an initial investment in net working capital of $157,000, and the fixed asset will have a market value of $182,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 11 percent.

Requirement 1:

What are the net cash flows of the project for the following years? (Do not include the dollar signs ($). Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).)

Year Cash Flow

0 $

1

2

3

Requirement 2:

What is the NPV of the project? (Do not include the dollar 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).)

NPV $

1 Answer

Relevance
  • Don G
    Lv 7
    8 years ago

    Cash Flow by Year:

    Yr 0 - Fixed asset invmt 2.31 mil + working capital 157,000 = Neg 2,467,000

    Yr 1 - Net sales 2.220 less costs 1.210 = 1.010 less 30% tax = 707,000 net after tax plus tax saving on annual depreciation 231,000 (2.31 / 3 x 30%) = 938,000

    Yr 2 - Same as YR 1 = 938,000

    Yr 3 - 938,000 + gain on sale of fixed asset, after tax of 127,400 (182,000 x 70%) + return of working capital of 157,000 = 1,222,400

    NPV = 33,155, as shown below.

    Yr 0 - (2,467,000)

    Discounted Cash flow, at 11% - YR 1 = 845,045; Yr 2 = 761,302; Yr 3 = 893,808.

    Total 2,500,155

    Net 33,155

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