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 $2.67 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 52,070,000 in annual sales, with costs of $765,000. The tax rate is 34 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.)

Explanation / Answer

Operating Cash Flow will be calculated using tax shield approach

Operating Cash Flow = (sales -cost)x(1-tc)+Tc(Depreciation)

Operating CAsh Flow = (2070000-765000)x(1-0.34)+0.34(2670000/3)=$1163900

NPV = Rx1-(1+i)^-n/i - Initial Investment

NPV = 1163900x1-(1+0.13)^-3/0.13-2670000

NPV = 2748146-2670000 =$78145.51

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.