Down Under Boomerang, Inc., is considering a new three-year expansion project th
ID: 1172686 • Letter: D
Question
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,060,000 in annual sales, with costs of $755,000. The tax rate is 35 percent and the required return is 13 percent.
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,060,000 in annual sales, with costs of $755,000. The tax rate is 35 percent and the required return is 13 percent.
Explanation / Answer
Project’s Net Present Value [ NPV] = $90,083
Firstly, Calculate the Annual Cash Flow
Annual Sales
2,060,000
Less : Costs
(755,000)
Less: Depreciation [ $26,40,000 / 3 Years ]
(880,000)
Net Income Before Tax
425,000
Less : Tax at 35%
148,750
Net Income After Tax
276,250
Add Back : Depreciation
880,000
Annual Cash Flow
1,156,250
Net Present Value [ NPV] = Present Value of Annual cash inflows – Initial Investments
= $1,156,250 x [PVIF 13%, 3 Years] - $26,40,000
= [$1,156,250 x 2.361153 ] - $26,40,000
= $2730082.69 – 26,40,000
= $90,082.69 or
= $90,083 [ Rounded ]
Annual Sales
2,060,000
Less : Costs
(755,000)
Less: Depreciation [ $26,40,000 / 3 Years ]
(880,000)
Net Income Before Tax
425,000
Less : Tax at 35%
148,750
Net Income After Tax
276,250
Add Back : Depreciation
880,000
Annual Cash Flow
1,156,250
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