Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.45 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,795,000 in annual sales, with costs of $705,000. The project requires an initial investment in net working capital of $420,000, and the fixed asset will have a market value of $435,000 at the end of the project. a. If the tax rate is 22 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.) b. If the required return is 9 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Cashflows of Year-0
Initial fixed assets			-2450000
Initial WC investment			-420000
Cashflows of Year-0			-2870000
Cash flows of eachh year:
			Year1	YEar2	YEar3
Annual sales			1795000	1795000	1795000
Less: Annual cost			705000	705000	705000
Less: Annual dep (2450000/3)			816666.7	816666.7	816666.7
Net income before tax			273333.3	273333.3	273333.3
Less: tax			60133.33	60133.33	60133.33
After tax income			213200	213200	213200
Add: Depreciation			816666.7	816666.7	816666.7
Annual cashflows			1029867	1029867	1029867
Release of WC					420000
After tax Salvage of FA					339300
(435000-22%)
Total cashflows			1029867	1029867	1789167
NPV:
			Year 0	Year 1	Year 2	Year 3
Cashflows			-2870000	1029867	1029867	1789167
PVF at 9%			1	0.917431	0.84168	0.772183
Present value of cashfows			-2870000	944832.1	866818.4	1381565
NPV			323215.7