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 $2.97 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,170,000 in annual sales, with costs of $847,000. The project requires an initial investment in net working capital of $390,000, and the fixed asset will have a market value of $255,000 at the end of the project. If the tax rate is 35 percent and the required return is 9 percent, what is the project’s Year 1 net cash flow? Year 2? Year 3? (Use MACRS) (A negative answer should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) What is the project's NPV? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

1 Year cash flow = (MACRS tax rates 1 y 33.33% 2 y 44.45% 3 y 14.81%

sales=2170,000-847000(costs) -440,955.90(dep)-308715.43(tax 35%)+440,955.90(dep)-390000(nwc)=$ 624,284.57

2 year cash flow= sales 2170,000-847000(costs)-588,073.50(dep)-257224.28(tax)+588073.50=$ 1065775.72

3 year cash flow= sales 2170,000-847000(costs)-195936.30(DEP)-394472.30(TAX)+195936.30(DEP)+390000(NWC)+255000(SV)=$ 1573,527.70

so the cash flows 1 year $ 624284.57 2 y $ 1065,775.72 3 y $ 1573,527.70

NPV= -2970,000+624284.57(.917)+1065,775.72(.842)+1573,527.70(.772)

-2970,000+2684,615.49 => -285,384.51

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