Down Under Boomerang, Inc., is considering a new three-year expansion project th
ID: 2652511 • Letter: D
Question
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.67 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,070,000 in annual sales, with costs of $767,000. The project requires an initial investment in net working capital of $290,000, and the fixed asset will have a market value of $265,000 at the end of the project.
If the tax rate is 34 percent and the required return is 13 percent, what is the project’s Year 1 net cash flow? Year 2? Year 3? (Use MACRS)
Raphael Restaurant is considering the purchase of a $9,300 soufflé maker. The soufflé maker has an economic life of four years and will be fully depreciated by the straight-line method. The machine will produce 1,650 soufflés per year, with each costing $2.10 to make and priced at $4.90. Assume that the discount rate is 14 percent and the tax rate is 34 percent. What is the NPV of the project?
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.67 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,070,000 in annual sales, with costs of $767,000. The project requires an initial investment in net working capital of $290,000, and the fixed asset will have a market value of $265,000 at the end of the project.
If the tax rate is 34 percent and the required return is 13 percent, what is the project’s Year 1 net cash flow? Year 2? Year 3? (Use MACRS)
Explanation / Answer
Answer:
Calculation of Net cash flows
Year 0
Year 1
Year 2
Year 3
Annual Sales
$ 2,070,000.00
$ 2,070,000.00
$ 2,070,000.00
Less: Costs
$ (767,000.00)
$ (767,000.00)
$ (767,000.00)
Less: Depreciation
$ (889,911.00)
$ (1,186,815.00)
$ (395,427.00)
(2670000*33.33%)
(2670000*44.45%)
(2670000*14.81%)
Profit before tax
$ 413,089.00
$ 116,185.00
$ 907,573.00
Less : Tax @ 34%
$ (140,450.26)
$ (39,502.90)
$ (308,574.82)
Profit after tax
$ 272,638.74
$ 76,682.10
$ 598,998.18
Add: Depreciation
$ 889,911.00
$ 1,186,815.00
$ 395,427.00
Cash flows after tax
$ 1,162,549.74
$ 1,263,497.10
$ 994,425.18
Initial fixed asset investment
$ (2,670,000.00)
Initial investment in net working capital
$ (290,000.00)
Salvage value
$ 265,000.00
Tax on Capital Gain [265000-(2670000*7.41%)]*34%
$ (22,832.02)
Net cash flows
$ (2,960,000.00)
$ 1,162,549.74
$ 1,263,497.10
$ 1,236,593.16
Calculation of Net cash flows
Year 0
Year 1
Year 2
Year 3
Annual Sales
$ 2,070,000.00
$ 2,070,000.00
$ 2,070,000.00
Less: Costs
$ (767,000.00)
$ (767,000.00)
$ (767,000.00)
Less: Depreciation
$ (889,911.00)
$ (1,186,815.00)
$ (395,427.00)
(2670000*33.33%)
(2670000*44.45%)
(2670000*14.81%)
Profit before tax
$ 413,089.00
$ 116,185.00
$ 907,573.00
Less : Tax @ 34%
$ (140,450.26)
$ (39,502.90)
$ (308,574.82)
Profit after tax
$ 272,638.74
$ 76,682.10
$ 598,998.18
Add: Depreciation
$ 889,911.00
$ 1,186,815.00
$ 395,427.00
Cash flows after tax
$ 1,162,549.74
$ 1,263,497.10
$ 994,425.18
Initial fixed asset investment
$ (2,670,000.00)
Initial investment in net working capital
$ (290,000.00)
Salvage value
$ 265,000.00
Tax on Capital Gain [265000-(2670000*7.41%)]*34%
$ (22,832.02)
Net cash flows
$ (2,960,000.00)
$ 1,162,549.74
$ 1,263,497.10
$ 1,236,593.16
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