Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.31 million. The fixed asset qualifies for 100 percent bonus depreciation. The project is estimated to generate $1,725,000 in annual sales, with costs of $632,000. The project requires an initial investment in net working capital of $280,000, 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 11 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

Question a:

Project's Year 0 net cash flow = -$2,590,000

Project's Year 1 net cash flow = $1,236,855.86

Project's Year 2 net cash flow = $683,069.56

Project's Year 3 net cash flow = $946,790.47

Question b:

Therefore, NPV of the Project is $276,715.88