Question

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,180,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $400,000, and the fixed asset will have a market value of $260,000 at the end of the project. If the tax rate is 30 percent and the required return is 9 percent, what is the project’s

Year 1 net cash flow =

Year 2 =

Year 3 =

NPV =

Answer 1

		Initial fixed asset investment	$3,000,000
		Initial working capital investment	$400,000
		Total initial cash flow	$3,400,000
		Present Value(PV) of cash flow=(Cash flow)/((1+i)^N)
		i=discount rate=required return=9%	0.09
		N=Year of cash flow
	N	Year	1	2	3
	A	Annual Sales	$2,180,000	$2,180,000	$2,180,000
	B	Annual cost	$855,000	$855,000	$855,000
	C=A-B	Before tax operating cash flow	$1,325,000	$1,325,000	$1,325,000
	D=C*(1-0.3)	After tax operating cash flow	$927,500	$927,500	$927,500
		Depreciation tax shield:
	E	MACRS 3 year depreciation rate	33.33%	44.45%	14.81%	7.41%
	F=3000000*E	Annual Depreciation	$          999,900	$ 1,333,500	$        444,300	$   222,300
	G=F*0.3	Depreciation tax shield	$          299,970	$     400,050	$        133,290
		Terminal Cash Flow:
	H	Before tax salvage value			$260,000
	I=260000-222300	Gain on Salvage			$37,700
	J=I*0.3	Tax on gain on salvage			$11,310
	K=H-J	After tax Cash flow from salvage			$248,690
	L	Cash flow from release of working capital			$400,000
	M=D+G+K+L	Net After tax Cash flow	$1,227,470	$1,327,550	$1,709,480	SUM
	PV=M/(1.09^N)	Present Value (PV)of Net Cash Flow	1126119.266	1117372.28	1320032.215	3563523.76
		Year1 net Cash Flow=	$1,227,470
		Year2 net Cash Flow=	$1,327,550
		Year3net Cash Flow=	$1,709,480
		NPV=(Sum of PV of positive cash flow)- (Initial Cash flow)
		NPV=	$163,524	(3563523.76-3400000)