LO2 9. Calculating Project OCF 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 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 $2.23 million in annual sales, with costs of $1.25 million. If the tax rate is 23 percent, what is the OCF for this project? LO2 10. Calculating Project NPV In the previous problem, suppose the required return on the project is 14 percent. What is the project's NPV? LO2 11. Calculating Project Cash Flow from Assets In the previous problem, suppose 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. What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? What is the new NPV?

Essentials Of Investments
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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Correct me if 9 or 10 are wrong and solve for 11 and 12. mention excel formulas if applied. 

118 LO2 9. Calculating Project OCF
119 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 will be depreciated straight-line to
120 zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2.23 million in annual sales, with costs of $1.25 million. If the tax rate is
121 23 percent, what is the OCF for this project?
122 LO2 10. Calculating Project NPV In the previous problem, suppose the required return on the project is 14 percent. What is the project's NPV?
123 LO2 11. Calculating Project Cash Flow from Assets
124 In the previous problem, suppose 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
125 the project. What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? What is the new NPV?
126 LO2 12. NPV and Modified ACRS In the previous problem, suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the
127 project's Year 1 net cash flow now? Year 2? Year 3? What is the new NPV?
128
129 Answer 9.
130
Annual Sales
$2,230,000
131
Annual Costs
$1,250,000
Depreciation (2150000/3)
Net Operation Income
$716,666.67
$263,333.33
$60,566.67
132
133
134
Tax at 23%
Net Operation Income after Tax
Add: Depreciation
$202,766.67
$716,666.67
$919,433.33
135
136
137
Operating Cash Flow
138 Answer 10.
$2,150,000
$919,433.33
139
Less: Intial Investment
140
Annual CF
141
Discount rate
14%
142
PV od OCF =
919433*(1.14^3-1)/(0.14*1.14^3)=
2134585.1
143
NPV
($15,415)
144 Answer 11.
145
Transcribed Image Text:118 LO2 9. Calculating Project OCF 119 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 will be depreciated straight-line to 120 zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2.23 million in annual sales, with costs of $1.25 million. If the tax rate is 121 23 percent, what is the OCF for this project? 122 LO2 10. Calculating Project NPV In the previous problem, suppose the required return on the project is 14 percent. What is the project's NPV? 123 LO2 11. Calculating Project Cash Flow from Assets 124 In the previous problem, suppose 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 125 the project. What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? What is the new NPV? 126 LO2 12. NPV and Modified ACRS In the previous problem, suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the 127 project's Year 1 net cash flow now? Year 2? Year 3? What is the new NPV? 128 129 Answer 9. 130 Annual Sales $2,230,000 131 Annual Costs $1,250,000 Depreciation (2150000/3) Net Operation Income $716,666.67 $263,333.33 $60,566.67 132 133 134 Tax at 23% Net Operation Income after Tax Add: Depreciation $202,766.67 $716,666.67 $919,433.33 135 136 137 Operating Cash Flow 138 Answer 10. $2,150,000 $919,433.33 139 Less: Intial Investment 140 Annual CF 141 Discount rate 14% 142 PV od OCF = 919433*(1.14^3-1)/(0.14*1.14^3)= 2134585.1 143 NPV ($15,415) 144 Answer 11. 145
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