Question

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 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 $2,110,000 in annual sales, with costs of $805,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $225,000 at the end of the project. a. If the tax rate is 23 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) b. If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

	Year 0	1	2	3
Fixed asset investment	(2,790,000)
Investment in working capital	(330,000)
Annual Sales		2,110,000	2,110,000	2,110,000
Costs		805,000	805,000	805,000
Depreciation		930,000	930,000	930,000
Income before taxes		375,000	375,000	375,000
Less: Taxes		86,250	86,250	86,250
Net Income		288,750	288,750	288,750
Add: Depreciation		930,000	930,000	930,000
Operating cash flows		1,218,750	1,218,750	1,218,750
After tax salvage value of fixed assets				173,250
Recovery of working capital				330,000
Cash flows	(3,120,000)	1,218,750	1,218,750	1,722,000
PVF	1	0.892857143	0.797193878	0.711780248
PV of cash flows	(3,120,000.00)	1,088,169.64	971,580.04	1,225,685.59
NPV	165,435.27