Down Under Boomerang, Inc., is considering a new three-year expansion project th

Question

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,180,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $400,000, and the fixed asset will have a market value of $260,000 at the end of the project. If the tax rate is 30 percent and the required return is 9 percent, what is the project’s

Year 1 net cash flow =

Year 2 =

Year 3 =

NPV =

Explanation / Answer

Initial fixed asset investment $3,000,000 Initial working capital investment $400,000 Total initial cash flow $3,400,000 Present Value(PV) of cash flow=(Cash flow)/((1+i)^N) i=discount rate=required return=9% 0.09 N=Year of cash flow N Year 1 2 3 A Annual Sales $2,180,000 $2,180,000 $2,180,000 B Annual cost $855,000 $855,000 $855,000 C=A-B Before tax operating cash flow $1,325,000 $1,325,000 $1,325,000 D=C*(1-0.3) After tax operating cash flow $927,500 $927,500 $927,500 Depreciation tax shield: E MACRS 3 year depreciation rate 33.33% 44.45% 14.81% 7.41% F=3000000*E Annual Depreciation $          999,900 $ 1,333,500 $        444,300 $   222,300 G=F*0.3 Depreciation tax shield $          299,970 $     400,050 $        133,290 Terminal Cash Flow: H Before tax salvage value $260,000 I=260000-222300 Gain on Salvage $37,700 J=I*0.3 Tax on gain on salvage $11,310 K=H-J After tax Cash flow from salvage $248,690 L Cash flow from release of working capital $400,000 M=D+G+K+L Net After tax Cash flow $1,227,470 $1,327,550 $1,709,480 SUM PV=M/(1.09^N) Present Value (PV)of Net Cash Flow 1126119.266 1117372.28 1320032.215 3563523.76 Year1 net Cash Flow= $1,227,470 Year2 net Cash Flow= $1,327,550 Year3net Cash Flow= $1,709,480 NPV=(Sum of PV of positive cash flow)- (Initial Cash flow) NPV= $163,524 (3563523.76-3400000)

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