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, after which it will be worthless. 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. 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

Compute the Net Present Value.

Particulars Year 0 Year 1 Year 2 Year 3 Initial Investment -2640000 Sales Amount 2060000 2060000 2060000 Less: Total Costs 755000 755000 755000 Depreciation 880000 880000 880000 Cash Flow Before Tax 425000 425000 425000 Less : Tax @35% 148750 148750 148750 Cash Flow After Tax 276250 276250 276250 Add: Depreciation 880000 880000 880000 Cash Flow -2640000 1156250 1156250 1156250 Discount @13% 1 0.884956 0.783147 0.69305 Discounted Cash Flows -2640000 1023230 905513.4 801339.3 Net Present Value 90082.69128

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