Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.38 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which it will be worthless. The project is estimated to generate $1,760,000 in annual sales, with costs of $670,000. The tax rate is 25 percent and the required return is 11 percent. What is the project’s NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Answer 1

Initial Fixed Asset Investment = 23,80,000

Depreciation on Fixed Asset = 23,80,000/3

= $7,93,333.33

.

Calculation of NPV:

Year	Initial Investment	Sales (1)	Cost (2)	Depreciation (3)	Net Profit Before Tax (4) = (1)-(2)-(3)	Tax @ 25% (5) = (4)*0.25	Net Profit After Tax (6) = (4)-(5)	Cash Flow (7) = (6)+(3)	DF @ 11% (8)	Present Value (9) = (7)*(8)
0	-23,80,000	-	-	-	-	-	-	-23,80,000	1	-23,80,000.00
1	-	17,60,000	6,70,000	7,93,333	2,96,667	74,167	2,22,500	10,15,833	0.900900901	9,15,165.17
2	-	17,60,000	6,70,000	7,93,333	2,96,667	74,167	2,22,500	10,15,833	0.811622433	8,24,473.12
3	-	17,60,000	6,70,000	7,93,333	2,96,667	74,167	2,22,500	10,15,833	0.731191381	7,42,768.58
									NPV	1,02,406.87