H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.15 million. The fixed asset qualifies for 100 percent bonus depreciation. The project is estimated to generate $2.23 million in annual sales, with costs of $1.25 million. The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $185,000 at the end of the project. Assume that the tax rate is 23 percent and the required return on the project is 14 percent.
What is the project’s NPV?

Question

07-10-2020
Business

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H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.15 million. The fixed asset qualifies for 100 percent bonus depreciation. The project is estimated to generate $2.23 million in annual sales, with costs of $1.25 million. The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $185,000 at the end of the project. Assume that the tax rate is 23 percent and the required return on the project is 14 percent.
What is the project’s NPV?

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amcool amcool · Answer 1 · 2020-10-08T14:13:06+02:00

Answer:

The net present value (NPV) of the project is $2,266,552.

Explanation:

Note: See the attached excel file for the calculation of the NPV of this project.

The following explanation and the formula are employed in the attached excel file.

Net present value (NPV) is calculated by deducting the present value of cash outflows from the present value of inflows of cash over a certain time period.

Also, present value (PV) can be described as the current value of a future sum of money or stream of cash flows given a specific return rate.

The following is the formula for calculating the PV:

PV = FV / (1 + r)^n

Where,

FV = Future value = Total future cash flow for each year ascalculated in the excel file

r = required return rate = 14%

n = Each relevant year