To calculate the net cash flow for the project, we need to consider the initial investment, annual cash flows from sales, depreciation, taxes, and the cash flow at the end of the project. Here's a step-by-step calculation:
Year 0:
Initial investment = -$1,860,000
Initial investment in working capital = -$150,000
Cash Flow in Year 0 = -$1,860,000 - $150,000 = -$2,010,000
Years 1-3:
Annual cash flows from sales = $1,950,000
Annual cash flows from costs = -$1,060,000
Operating profit before depreciation and taxes = $1,950,000 - $1,060,000 = $890,000
Depreciation (using MACRS 3-year class rates of 33.33%, 44.45%, and 14.81%):
Year 1: $1,860,000 * 33.33% = $619,338
Year 2: $1,860,000 * 44.45% = $826,170
Year 3: $1,860,000 * 14.81% = $275,310
Operating profit after depreciation:
Year 1: $890,000 - $619,338 = $270,662
Year 2: $890,000 - $826,170 = $63,830
Year 3: $890,000 - $275,310 = $614,690
Taxes (35%):
Year 1: $270,662 * 35% = $94,731.70
Year 2: $63,830 * 35% = $22,340.50
Year 3: $614,690 * 35% = $215,141.50
Operating profit after taxes:
Year 1: $270,662 - $94,731.70 = $175,930.30
Year 2: $63,830 - $22,340.50 = $41,489.50
Year 3: $614,690 - $215,141.50 = $399,548.50
Net cash flow (operating profit after taxes + depreciation):
Year 1: $175,930.30 + $619,338 = $795,268.30
Year 2: $41,489.50 + $826,170 = $867,659.50
Year 3: $399,548.50 + $275,310 = $674,858.50
Year 3 additional cash flows:
Working capital recovery = $150,000
Fixed asset market value = $175,000
Year 3 total cash flow = $674,858.50 + $150,000 + $175,000 = $999,858.50
So the net cash flows for each year are:
Year 0: -$2,010,000
Year 1: $795,268.30
Year 2: $867,659.50
Year 3: $999,858.50
Now, to calculate the NPV of the project, we will discount these cash flows using the required return of 14%:
NPV = (-$2,010,000 / (1 + 0.14)^0) + ($795,268.30 / (1 + 0.14)^1) + ($867,659.50 / (1 + 0.14)^2) + ($999,858.50 / (1 + 0.14)^3)
NPV = -$2,010,000 + $696,725.27 + $664,826.84 + $673,_711.87
NPV = $25,263.98
The NPV of the project is $25,263.98.
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $1,950,000 in annual sales, with costs of $1,060,000. The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $175,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 14 percent.
Requirement 1:
What is the net cash flow of the project for the following years? (Do not round intermediate calculations. 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?
1 answer
1 answer