Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.28 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,750,000 in annual sales, with costs of $660,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $300,000 at the end of the project. a. If the tax rate is 23 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 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow b. NPV

Answer 1

1)

Year 0 cash flow = Fixed investment + NWC

Year 0 cash flow = (-2,280,000) + (-330,000)

Year 0 cash flow = -2,610,000

2)

Annual depreciation = 2,280,000 / 3 = 760,000

Year 1 cash flow = (Sales - costs - depreciation)(1 - tax) + depreciation

Year 1 cash flow = (1,750,000 - 660,000 - 760,000)(1 - 0.23) + 760,000

Year 1 cash flow = $1,014,100

3)

Year 2 cash flow = $1,014,100

4)

After tax non operating cash flow = Market value + NWC - tax(Market value - book value)

After tax non operating cash flow = 300,000 +  330,000 - 0.23(300,000 - 0)

After tax non operating cash flow = 300,000 +  330,000 - 69,000

After tax non operating cash flow = 561,000

Year 3 cash flow = 561,000 + 1,014,100

Year 3 cash flow = $1,575,100

5)

NPV = -2,610,000 + 1,014,100 / (1 + 0.12)¹ + 1,014,100 / (1 + 0.12)² + 1,575,100 / (1 + 0.12)³

NPV = $225,005.81