Question
In: Finance
Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed...
Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.37 million. The fixed asset falls into the 3-year MACRS class (MACRS schedule). The project is estimated to generate $1,765,000 in annual sales, with costs of $664,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $345,000 at the end of the project.
| a. |
If the tax rate is 21 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? |
| b. | If the required return is 11 percent, what is the project's NPV? |
Solutions
Expert Solution
operating cash flow (OCF) in each year = income after tax + depreciation
book value of fixed asset at end of year 3 = fixed asset investment - total depreciation = $2,370,000 - $789,921 - $1,053,465 - $350,997 = $175,617
profit on sale of fixed asset = sale price - book value = $345,000 - $175,617 = $169,383
tax on salvage value = profit on sale of fixed asset * tax rate
NPV is calculated using NPV function in Excel
NPV is $267,893
jeff jeffy answered 3 months agoRelated Solutions
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