Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.3 million. The fixed asset qualifies for 100 percent bonus depreciation. The project is estimated to generate $1,720,000 in annual sales, with costs of $628,000. The project requires an initial investment in net working capital of $270,000, and the fixed asset will have a market value of $210,000 at the end of the project. a. If the tax rate is 22 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

Cashflows of Year-0
Initial fixed assets			-2300000
Initial WC investment			-270000
Cashflows of Year-0			-2570000
Cash flows of eachh year:
			Year1	YEar2	YEar3
Annual sales			1720000	1720000	1720000
Less: Annual cost			628000	628000	628000
Less: Annual dep (2450000/3)			766666.7	766666.7	766666.7
Net income before tax			325333.3	325333.3	325333.3
Less: tax			71573.33	71573.33	71573.33
After tax income			253760	253760	253760
Add: Depreciation			766666.7	766666.7	766666.7
Annual cashflows			1020427	1020427	1020427
Release of WC					270000
After tax Salvage of FA					163800
(210000-22%)
Total cashflows			1020427	1029867	1454227
NPV:
			Year 0	Year 1	Year 2	Year 3
Cashflows			-2570000	1020427	1020427	1454227
PVF at 10%			1	0.909091	0.826446	0.751315
Present value of cashfows			-2570000	927660.9	843328.1	1092582
NPV			293571