Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.31 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,725,000 in annual sales, with costs of $635,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $225,000 at the end of the project.

a.	If the tax rate is 23 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 11 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

a)
	Year	0	1	2	3
	Investment cost (A)	$ (2,310,000)
	Investment in Net working capital (B)	$     (280,000)
	Sale		$ 1,725,000	$ 1,725,000	$ 1,725,000
	Less: cost		$     635,000	$     635,000	$     635,000
	Less: Depreciation		$     770,000	$     770,000	$     770,000
	Earning before tax		$     320,000	$     320,000	$     320,000
	Less: tax @23%		$        73,600	$        73,600	$        73,600
	Earning after tax		$     246,400	$     246,400	$     246,400
	Add: Dep		$     770,000	$     770,000	$     770,000
	OCF (C )		$ 1,016,400	$ 1,016,400	$ 1,016,400
	Salvage value after tax (D) (225000*(1-0.23))				$     173,250
	Release of Net working capital (E )				$     280,000
	Cash Flows (A+B+C+D+E)	$ (2,590,000)	$ 1,016,400	$ 1,016,400	$ 1,469,650
b)
	NPV = P.V of Cash Inflows - P.V of Cash Out flows
	NPV = $1016400/(1.11) + $1016400/(1.11)2 +$1469650/(1.11)3 - $2590000
	NPV = $225,204.13