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 $2.49 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,010,000 in annual sales, with costs of $719,000. The project requires an initial investment in net working capital of $230,000, and the fixed asset will have a market value of $295,000 at the end of the project. If the tax rate is 34 percent and the required return is 16 percent, what is the project’s Year 1 net cash flow? Year 2? Year 3? what is the NPV?

Explanation / Answer

Year 0 Year 1 Year 2 Year 3 Sales 2010000 2010000 2010000 Costs 719000 719000 719000 Depreciation 829917 1106805 368769 Operating Profit 461083 184195 922231 Tax 156768.2 62626.3 313558.5 Net Profit 304314.8 121568.7 608672.5 Investment In Fixed asset -2490000 Investment in WC -230000 Release of wc 230000 Cashflow from sale of assets 257433.1 Total Inv 94,095.59 -2720000 1134232 1228374 1464875

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