Question

Problem 8-4 Calculating Project Cash Flow from Assets Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,050,000 in annual sales, with costs of $745,000. The project requires an initial investment in net working capital of $270,000, and the fixed asset will have a market value of $275,000 at the end of the project. If the tax rate is 30 percent, what is the project's Year O net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.) Cash Flow A 288000 1174474 A Year o Year 1 Year 2 Year 3 A A if the required return is 15 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $

Answer 1

1.

Cash Flow
Year 0	- 2,880,000
Year 1	1,174,500
Year 2	1,174,500
Year 3	1,637,000

Annual operating cash flows after taxes = EBITDA * ( 1 - t ) + Depreciation * t = $ ( 2,050,000 - 745,000 ) * 0.7 + $ (2,610,000 / 3) * 0.3 = $ 913,500 + $ 261,000 = $ 1,174,500

After tax salvage value of the asset at the end of Year 3 = $ 275,000 x 0.7 = $ 192,500

Cash flows in Year 3 = $ 1,174,500 + $ 192,500 + $ 270,000 = $ 1,637,000

2. NPV : $ 105,712.15

Year	Cash Flows	PV factor at 15 %	Present Values
Year 0	- 2,880,000	1.000	- 2,880,000
Year 1	1,174,500	0.8696	1,021,345.20
Year 2	1,174,500	0.7561	888,039.45
Year 3	1,637,000	0.6575	1,076,327.50
		NPV	105,712.15