Question

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.46 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,000,000 in annual sales, with costs of $695,000. The project requires an initial investment in net working capital of $220,000, and the fixed asset will have a market value of $300,000 at the end of the project. If the tax rate is 35 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)
  

	Cash Flow
Year 0	$
Year 1	$
Year 2	$
Year 3	$

If the required return is 16 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
NPV           $

Answer 1

Initial cash Outflow=Fixed capital investment+working capital Investment
Initial investment=	2460000+220000
Initial investment=	(2,680,000)
Depreciation expense calculation
Dep exp=(2460000-0)/3
dep exp=	820,000
cash flow(1 to 3 year)
	(sale-cost-depreciation)*(1-tax)+ depreciation
	(2000000-695000-820000)*(1-.35)+820000
	1,135,250
	Terminal year cash flow=Fixed capital sale+net working capital -tax*(sale price-book value of fixed asset)
	terminal year cash flow=	300000+220000-.35*(300000-0)
		415,000 Method 1 calculate NPV Using NPV Function in excel and subtract Initial cash Outflow from it Year Project A 0 (2,680,000) 1 1,135,250 2 1,135,250 3 1,550,250 Discount rate 16% NPV= 135,519.04 Method 2 Using Financial Calculator Project A Press CF CF0= (2,680,000) (Press Enter and scroll down) CF1= 1,135,250 (Press Enter and scroll down) CF2= 1,135,250 (Press enter and scroll down twice) CF3= 1,550,250 (Press enter and scroll down twice) Press NPV Interest= 16 (Press Enter and scroll down) Press CPT+NPV NPV= 135,519.04