Question

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.82 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,120,000 in annual sales, with costs of $807,000. The project requires an initial investment in net working capital of $340,000, and the fixed asset will have a market value of $230,000 at the end of the project.

a.	If the tax rate is 24 percent, what is the project’s Year 1 net cash flow? Year 2? Year 3? Table 8.3.
b.	If the required return is 12 percent, what is the project's NPV?

Answer 1

	Year 0	1	2	3
Fixed asset investment	-2820000
Working capital investment	-340000
Annual Sales		2,120,000.00	2,120,000.00	2,120,000.00
Costs		807,000.00	807,000.00	807,000.00
Depreciation		939,906.00	1,253,490.00	417,642.00
Income before tax		373,094.00	59,510.00	895,358.00
Less: Taxes		89,542.56	14,282.40	214,885.92
Net Income		283,551.44	45,227.60	680,472.08
Add: Depreciation		939,906.00	1,253,490.00	417,642.00
Operating Cash flows		1,223,457.44	1,298,717.60	1,098,114.08
Recovery of working capital				340,000.00
After tax salvage value				224,950.88
Total cash flows	-3160000	1,223,457.44	1,298,717.60	1,663,064.96
PV factor	1	0.89286	0.79719	0.71178
PV of cash flows	(3,160,000.00)	1,092,372.71	1,035,329.72	1,183,736.79
NPV	151,439.22
Written down value	208962
Sale value	230,000.00
Gain on Sale	21,038.00
Tax on gain	5,049.12
After tax sale value	224,950.88