Question

Use the following information to answer the next 5 questions.

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.41 million. The fixed asset falls into the 3-year MACRS class (MACRS schedule) (Links to an external site.). The project is estimated to generate $1,775,000 in annual sales, with costs of $672,000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $375,000 at the end of the project.

1) If the tax rate is 23 percent, what is the project’s Year 0 incremental cash flow?

2) If the tax rate is 23 percent, what is the project’s Year 1 incremental cash flow?

3) If the tax rate is 23 percent, what is the project’s Year 2 incremental cash flow?

4) If the tax rate is 23 percent, what is the project’s Year 3 incremental cash flow?

5) If the required return is 9 percent, what is the project's NPV?

Answer 1

less: less: after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale $375,000.00 $178,581.00 $196,419.00 less: $1,775,000.00 $672,000.00 $803,253.00 $299,747.00 $68,941.81 $230,805.19 $803,253.00 $1,034,058.19 2 $1,775,000.00 $672,000.00 $1,071,245.00 $31,755.00 $7,303.65 $24,451.35 $1,071,245.00 $1,095,696.35 3 $1,775,000.00 $672,000.00 $356,921.00 $746,079.00 $171,598.17 $574,480.83 $356,921.00 $931,401.83 add: salvage value less: tax on gain after tax salvage value $375,000.00 $45,176.37 $329,823.63 YEAR annual sales costs depreciation EBT tax @ 23% EAT depreciation OCF initial investment: plant -$2,410,000.00 working capital - $380,000.00 after tax salvage value: plant Cash flows -$2,790,000.00 pv @ 9% 1 PRESENT VALUE -$2,790,000.00 NPV $348,230.12 $380,000.00 $329,823.63 $1,641,225.46 $1,034,058.19 0.91743 $948,677.24 0 $1,095,696.35 .84168 $922,225.70 $1,267,327.19 year o year 1 year 2 $2,790,000 $1,034,058 $1,095,696 $1,641,225 $348,230.12 Iyear 3 b) NPV