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 $

Explanation / Answer

Cost of the Fixed Asset = $ 2.79 million Life of the Asset = 3 years Annual Depreciation = 2.79 / 3 = 0.93 million =$ 930000 Estimated Annual Cash Fow Sales 2110000 Less : Cost 805000 Net Income 1305000 Less : Depreciation 930000 Net Income before Tax 375000 Less: Tax @ 35% 131250 Net Income After Tax 243750 Add : Depreciation 930000 Cash Flow after Tax 1173750 Discounting rate = 12 % PV factor for 3 year = 2.40183126822157 Present Value of Cas Flow (1173750*PV Factor) 2819149.45 Less : Initial Investment 2790000.00 NPV 29149.45

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