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 $2.79 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 $2,110,000 in annual sales, with costs of $805,000. The tax rate is 35 percent and the required return is 12 percent. What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ Maxwell Software, Inc., has the following mutually exclusive projects. Year Project A Project B 0 –$18,000 –$21,000 1 11,000 12,000 2 7,500 8,500 3 2,700 7,500 ________________________________________ a-1. Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) Payback period Project A years Project B years ________________________________________ a-2. Which, if either, of these projects should be chosen? Project A Project B Both projects Neither project b-1. What is the NPV for each project if the appropriate discount rate is 16 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV Project A $ Project B $ ________________________________________ b-2. Which, if either, of these projects should be chosen if the appropriate discount rate is 16 percent? Project A Project B Both projects Neither project

Explanation / Answer

Cash inflows per year = Cash flow from operations net of tax + Tax savings on depreciation

= [(2110000 - 805000) x (1-0.35)] + [(2790000 / 3) x 0.35]

= $1173750

Present value of an annuity @ 12% for 3 years = 2.40183126819.................

Present value of cash inflows = 1173750 x 2.40183126819.................

= $2819149.45

NPV = Present value of cash inflows - Present value of cash inflows

= 2819149.45 - 2790000

= $29149.45

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