Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.37 million. The fixed asset qualifies for 100 percent bonus depreciation. The project is estimated to generate $1,780,000 in annual sales, with costs of $676,000. The project requires an initial investment in net working capital of $390,000, and the fixed asset will have a market value of $390,000 at the end of the project.

  

a.	If the tax rate is 24 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 10 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.)

    

Answer 1

Req a:
Cashflows for Year-0
Initial investment in fixed assets				-2370000
Add: Working capital invvestment				-390000
Cashflows for Year-0				-2760000
Annual cashflows
Annual sales				1780000
Less: Annual cost				676000
Net Income before tax				1104000
Less: tax @ 24%				264960
Net Income after taxx				839040
Cashflows for Years			1	2	3
After taxx net Income			839040	839040	839040
Tax shield on dep (2370000*24%)			568800
After tax Salvage value					296400
	(390000-24%)
Working capital release					390000
Cashflows for Years			1407840	839040	1525440
Req b:
NPV at 10%
			Year-0	Year-1	Year-2	Year-3
Cashflows for the year			-2760000	1407840	839040	1525440
PVF at 10%			1	0.909091	0.826446	0.751315
Present value of cashflows			-2760000	1279855	693421.5	1146086
NPV			359361.7