Down Under Boomerang, Inc., is considering a new three-year expansion project th
ID: 2740610 • Letter: D
Question
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.46 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,000,000 in annual sales, with costs of $711,000. The project requires an initial investment in net working capital of $220,000, and the fixed asset will have a market value of $300,000 at the end of the project. If the tax rate is 35 percent and the required return is 16 percent, what is the project’s Year 1 net cash flow? Year 2? Year 3? (
(Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
What is the NPV? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
(Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
What is the NPV? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Answer
We have been provided with the information as follow
Initial Investment
2,460,000
Add: Working Capital Requires
220,000
Depriciation method
three-year MACRS
Sales
2,000,000
Less:
Variable Cost
711,000
Contrbution
1,289,000
Less: 35% tax
451150
Cash Flow
837,850
Now first of all we will calculate Depreciation and Depreciation Tax Shield as follow,
Year
Assets Valu
Dep.
Rate
Depriciation
Dep. Tax
Shield
1
2,460,000
33.33%
819918
286971.3
2
2,460,000
44.45%
1093470
382714.5
3
2,460,000
14.81%
364326
127514.1
When company sale the machine that time cash flow would be as follow,
Salvage Value
300,000
Less : 35% tax
(300,000-182286)
41200
Net Cash Flow
258,800
Now we will compute NPV as follow
Year
Cash Flow
Dep. Tax
Shield
Realese of
Working
Capital
Salvage
Recipt
Net
Cash Flow
PV Factor@16%
Prasent
Value
0
-2,680,000
-2,680,000
1
-2680000
1
837850
286971.3
1,124,821
0.862069
969673.5
2
837850
382714.5
1,220,565
0.743163
907078.3
3
837850
127514.1
220,000
258,800
1,444,164
0.640658
925214.8
121966.6
NPV of the Project is $ 1211966.6
Initial Investment
2,460,000
Add: Working Capital Requires
220,000
Depriciation method
three-year MACRS
Sales
2,000,000
Less:
Variable Cost
711,000
Contrbution
1,289,000
Less: 35% tax
451150
Cash Flow
837,850
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