Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.38 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,760,000 in annual sales, with costs of $670,000. The project requires an initial investment in net working capital of $350,000, and the fixed asset will have a market value of $330,000 at the end of the project.

a. If the tax rate is 25 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)

b. If the required return is 10 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

Req a:
Cashflows of Year-0
Initial investment in Fixed assets				-2380000
Net Working capital investment				-350000
Cash outflows of Year-0				-2730000
Cashflows for Year1 and 2
Annual sales			1760000
Less: Annual cost			670000
Less: Depreciation (2380000/3)			793333.3
Net Income before tax			296666.7
Less: Tax @ 25%			74166.67
After tax income			222500
Add: Depreciation			793333.3
Annual cashflows			1015833
Cash Flows for Year-3
Annual cashflows			1015833
Add: After tax salvage value			247500
	(330000*75%)
Add: WC release			350000
Cash Flows for Year-3			1613333
Req b:
NPV at 10%
			Year -0	Year-1	Year-2	Year-3
Cashflows			-2730000	1015833	1015833	1613333
PF at 10%			1	0.909091	0.826446	0.751315
Present value of cashflows			-2730000	923484.5	839531.4	1212121
NPV			245137