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 will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,060,000 in annual sales, with costs of $755,000. The tax rate is 35 percent and the required return is 13 percent. 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.

Explanation / Answer

DOWN UNDER BOOMERANG,INC Initial Investment $    2,640,000.00 Useful Life 3 Years Depreciation $       880,000.00 Annual Sales $    2,060,000.00 Cost $       755,000.00 Profit Before Depreciation $    1,305,000.00 Les: Depreciation $       880,000.00 Net Profit before tax $       425,000.00 Tax @ 35% $       148,750.00 Profit After Tax $       276,250.00 Add: Depreciation $       880,000.00 Operating Cash Flow $    1,156,250.00 Market Value $       270,000.00 Year 0 Year 1 Year 2 Year 3 Cash Inflow $ (2,640,000.00) Working Capital $     (280,000.00) $      280,000.00 Market Value $      175,500.00 Cash Inflow $ (2,920,000.00) $ 1,156,250.00 $ 1,156,250.00 $ 1,611,750.00 P.V Factor 1 0.88496 0.78315 0.69305 P.V. $ (2,920,000.00) $ 1,023,235.00 $      905,517.19 $ 1,117,023.34 NPV $       125,775.53 Note: Working Capital is invested in Year 0 and recovered after tax in the end of year. NPV is possitive so Project shoud be accepted. Market Value after tax= 175500

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