Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.37 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,780,000 in annual sales, with costs of $690,000. The project requires an initial investment in net working capital of $390,000, and the fixed asset will have a market value of $390,000 at the end of the project. a. If the tax rate is 24 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.) b. If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.37 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,780,000 in annual sales, with costs of $690,000. The project requires an initial investment in net working capital of $390,000, and the fixed asset will have a market value of $390,000 at the end of the project. a. If the tax rate is 24 percent, what is the project's Year O net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.) b. If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow NPV

Answer 1

solution: ol sales Less : costs Less : depreciation=2370000/3 EBT Less : Tax at 24% EAT Add : depreciation OCF Inital cost working capital changes after tax sale value=390000*(1-0.24) net cash flow 3 1,780,000.00 1,780,000.00 1,780,000.00 690,000.00 - 690,000.00 - 690,000.00 790,000.00 - 790,000.00 - 790,000.00 300,000.00 300,000.00 300,000.00 72,000.00 - 72,000.00 72,000.00 228,000.00 228,000.00 228,000.00 790,000.00 790,000.00 790,000.00 1,018,000.00 1,018,000.00 1,018,000.00 -2,370,000.00 - 390,000.00 390,000.00 296,400.00 1704400.00 -2760000.00 1018000.00 1018000.00 b) 3 net cash flow x PV factor at 10%** PV NPV -2760000.00 1.00000 -2760000.00 287317.81 1 1018000.00 0.90909 925454.55 2 1018000.00 0.82645 841322.31 1704400.00 0.75131 1280540.95 **PV factor working formula Year 1/(1+r)^n working 1/(1+0.1)^0 1 1/(1+0.1)^1 2 1/(1+0.1)^2 3 1/(1+0.113 PV factor at 10% 1.00000 0.90909 0.82645 _ 0.75131