Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.296 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $100,800 after 3 years. The project requires an initial investment in net working capital of $144,000. The project is estimated to generate $1,152,000 in annual sales, with costs of $460,800. The tax rate is 31 percent and the required return on the project is 16 percent. The net cash flow in Year 0 is $ the net cash flow in Year 1 is $ the net cash flow in Year 2 is $ and the net cash flow in Year 3 is $ . The NPV for this project is $ . (Do not include the dollar signs ($). Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))

Answer 1

a.
	The Net Cash flow in Year 0				$ -14,40,000.00
	Working:
	Initial Fixed Asset Investment				$         12,96,000
	Initial investment in net working capital				$           1,44,000
	The net Cash flows in Year 0				$       -14,40,000
b.
	The Net cash flow in year 1				$     6,10,834.61
	Working:
	i.	Depreciation Schedule
	Year	Costs (1)	Depreciation rate (2)		Depreciation Expense (3)		Accumulated Depreciation (4)			Ending Book Value (5)= (1) -(4)
	1	$   12,96,000		33.33%	$           4,31,957			$   4,31,957		$ 8,64,043
	2	$   12,96,000		44.45%	$           5,76,072			$ 10,08,029		$ 2,87,971
	3	$   12,96,000		14.81%	$           1,91,938			$ 11,99,966		$     96,034
	ii.	Annual Sales			$         11,52,000
		Annual Cost			$          -4,60,800
		Depreciation Expense			$          -4,31,957
		Profit Before Tax			$           2,59,243
		Tax Expense			$             -80,365
		Net Income			$           1,78,878
		Depreciation Expense			$           4,31,957
		Annual Cash flow			$           6,10,835
c.
	The Net cash flow in Year 2				$     6,10,834.61
d.
	Net Cash fllow in Year 3				$     8,54,157.02
	Working:
i.	Sale Proceeds		a		$           1,00,800
	Book Value		b		$               96,034
	profit on sale		c=a-b		$                 4,766
	Tax on Profit on sale		d=c*31%		$                 1,478
	After tax sale proceeds		a-d		$               99,322
ii.
	Annual operating cash flow				$           6,10,835
	After Tax Sale of Fixed Assets				$               99,322
	Release of workig capital				$           1,44,000
	Net Cash flow				$           8,54,157
e.
	The NPV for this project is				$         87,753.43
	Working:
	Year	Cash flow	Discount factor		Present Value
	0	$ -14,40,000	1.0000		$ -14,40,000.00
	1	$     6,10,835	0.8621		$     5,26,581.56
	2	$     6,10,835	0.7432		$     4,53,949.62
	3	$     8,54,157	0.6407		$     5,47,222.25
		Net Present value			$         87,753.43