Question
In: Finance
Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed...
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Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.18 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,730,000 in annual sales, with costs of $640,000. The project requires an initial investment in net working capital of $290,000, and the fixed asset will have a market value of $240,000 at the end of the project.
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Solutions
Expert Solution
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Initial investment (year 0) |
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| fixed assets investment | -2180000 |
| working capital | -290000 |
| Year 0 cash flow is | -2470000 |
| Year 1 | Year2 | Year 3 | |
| Sales | 1730000.00 | 1730000.00 | 1730000.00 |
| Less : costs | -640000.00 | -640000.00 | -640000.00 |
| less : depreciation (2180000/3)= | -726666.67 | -726666.67 | -726666.67 |
| Profit before tax | 363333.33 | 363333.33 | 363333.33 |
| less : tax @24% | -87200.00 | -87200.00 | -87200.00 |
| Profit after tax | 276133.33 | 276133.33 | 276133.33 |
| Add : Depreciation | 726666.67 | 726666.67 | 726666.67 |
| Add :market value at end | - | - | 240000.00 |
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Less : tax on capital gain 24% |
-57600.00 | ||
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Add : Working capital received at end |
290000.00 | ||
| Free cash flow | 1002800.00 | 1002800.00 | 1475200.00 |
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Calcultion of NPV |
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| i = 12% | ||||
| Year | 0 | 1 | 2 | 3 |
| free Cash flow | -2470000 | 1002800.00 | 1002800.00 | 1475200.00 |
| PVF = 1/(1+i)^n= | 1 | 0.8928571429 | 0.7971938776 | 0.7117802478 |
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for year 1 PVF =1/(1+20%)^1 |
||||
| and so on | ||||
| PV= FCf * PVF | -2470000 | 895357.1429 | 799426.0204 | 1050018.222 |
| NPV (total of pv) | 274801.3848 | |||
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NPV is $274801.38. So project should be accepted. |
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jeff jeffy answered 4 months agoRelated Solutions
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