Question

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,060,000 in annual sales, with costs of $759,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $270,000 at the end of the project. a. If the tax rate is 22 percent, what is the project’s Year 1 net cash flow? Year 2? Year 3? Table 8.3. (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, rounded to 2 decimal places, e.g., 1,234,567.89.) b. If the required return is 13 percent, what is the project's NPV? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 1,234,567.89.)

Answer 1

The three year MACRS depreciation schedule depreciates 33.33%, 44.45%, 14.81% and 7.41% of the asset value in the years 1-4 respectively

The net cashflow calculation is as shown below

Year	0	1	2	3
Revenue		2060000	2060000	2060000
Less: Costs		759000	759000	759000
Less:Depreciation		879912	1173480	390984
EBT		421088	127520	910016
Less : Tax		92639.36	28054.40	200203.52
PAT		328448.64	99465.60	709812.48
Add:Depreciation		879912	1173480	390984
Investment	2640000
Net working capital	280000			280000
After tax Salvage Value				253637.28
Net Cashflows	-2920000	1208360.64	1272945.60	1634433.76

a) Year 1 Net Cashflow = $1208360.64

Year 2 Net Cashflow = $1272945.60

Year 3 Net Cashflow = $1634433.76

b) NPV = -2920000 + 1208360.64/1.13+1272945.60/1.13^2+1634433.76/1.13^3

=$ 278,993.41