Down Under Boomerang, Inc., is considering a new three-year expansion project th
ID: 2774521 • Letter: D
Question
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.82 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,120,000 in annual sales, with costs of $815,000. The tax rate is 30 percent and the required return is 12 percent. The project requires an initial investment in net working capital of $340,000, and the fixed asset will have a market value of $230,000 at the end of the project.
What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)
What is the NPV?
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.82 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,120,000 in annual sales, with costs of $815,000. The tax rate is 30 percent and the required return is 12 percent. The project requires an initial investment in net working capital of $340,000, and the fixed asset will have a market value of $230,000 at the end of the project.
Explanation / Answer
Calculation of Cash Flows and NPV:
Year 0
Year 1
Year 2
Year 3
Initial Investment In fixed assets
$ (2,820,000.00)
Initial Investment in working capital
$ (340,000.00)
Annual Sales ( Net of tax) = 2120000*(1-30%)
$ 1,484,000.00
$ 1,484,000.00
$ 1,484,000.00
Annual Costs ( Net of tax) = 815000*(1-30%)
$ (570,500.00)
$ (570,500.00)
$ (570,500.00)
Tax Saving of depreciation = (Cost /Life )*tax rate
$ 282,000.00
$ 282,000.00
$ 282,000.00
= (2820000/3)*30%
Terminal Value of asset (Net of tax) = 230000*(1-30%)
$ 161,000.00
Net Cash Flows
$ (3,160,000.00)
$ 1,195,500.00
$ 1,195,500.00
$ 1,356,500.00
PVF (12%)
1.00000
0.89286
0.79719
0.71178
PV = Cash Flows*PVF
$ (3,160,000.00)
$ 1,067,410.71
$ 953,045.28
$ 965,529.91
NPV = Sum of PVs'
$ (174,014.10)
Calculation of Cash Flows and NPV:
Year 0
Year 1
Year 2
Year 3
Initial Investment In fixed assets
$ (2,820,000.00)
Initial Investment in working capital
$ (340,000.00)
Annual Sales ( Net of tax) = 2120000*(1-30%)
$ 1,484,000.00
$ 1,484,000.00
$ 1,484,000.00
Annual Costs ( Net of tax) = 815000*(1-30%)
$ (570,500.00)
$ (570,500.00)
$ (570,500.00)
Tax Saving of depreciation = (Cost /Life )*tax rate
$ 282,000.00
$ 282,000.00
$ 282,000.00
= (2820000/3)*30%
Terminal Value of asset (Net of tax) = 230000*(1-30%)
$ 161,000.00
Net Cash Flows
$ (3,160,000.00)
$ 1,195,500.00
$ 1,195,500.00
$ 1,356,500.00
PVF (12%)
1.00000
0.89286
0.79719
0.71178
PV = Cash Flows*PVF
$ (3,160,000.00)
$ 1,067,410.71
$ 953,045.28
$ 965,529.91
NPV = Sum of PVs'
$ (174,014.10)
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