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 $2.64 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. If the tax rate is 35 percent and the required return is 13 percent, what is the project’s Year 1 net cash flow? Year 2? Year 3? (Use MACRS) (A negative answer should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) What is the project's NPV? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Compute the Net present value.

Year 0 1 2 3 Intial investment (A) -2640000 Annual sales 2060000 2060000 2060000 Less: costs 759000 759000 759000 Less: Dep 880000 880000 880000 Earning before tax 421000 421000 421000 Less: tax @35% 147350 147350 147350 Earning After tax 568350 568350 568350 Add: Dep 880000 880000 880000 Operating cash Flow (B) 1448350 1448350 1448350 Discount rate 13%            1.00               0.88                0.78                 0.69 Cash Flows (A+B) -2970000 1,281,725.66    1,134,270.50    1,003,779.20 NPV 449775.365

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