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 $2.52 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,020,000 in annual sales, with costs of $715,000. The tax rate is 30 percent and the required return is 16 percent. What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Operating Cashflow

Depreciation = $2520,000/3 years = $840,000

NPV of the Project

Project's NPV is $97,584.26

$ Revenue       2,020,000 -Expenses (excluding depreciation)        (715,000) Profits before depreciation and taxes       1,305,000 -depreciation        (840,000) Net profits before taxes         465,000 -taxes        (139,500) Net profits after taxes         325,500 +depreciation         840,000 Operating cash inflows       1,165,500

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