e CO ezto.mheducation.com/hm.tpx Question 4 (of 12 4. Down Under Boomerang, Inc.
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e CO ezto.mheducation.com/hm.tpx Question 4 (of 12 4. Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fxed asset investment of $2.97 million. The fixed asset will be depreciated straighi-line to zero over its three-year tax We. The project is estimated to generate $2,170,000 in annual ?ales, with costs of $865,000 The tax rate is 35 percent and the required return is 9 percent The project requires an initial investment in net working capital of $390,000, and the fixed asset will have a market value of $255,000 at the end of the project What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) Year 0 Year 1 Year 2 Year 3 What is the NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV eBook & Resources eBook 6.3 Altemative Definitions of Operating Cash Flow Check my workExplanation / Answer
Years
Cash Flow
Year 0
$33,60,000
Year 1
$11,94,750
Year 2
$11,94,750
Year 3
$1703250
Net Present Value [NPV]
$56,920
Calculations
Calculate of Annual Cash Flow
Annual Sales
21,70,000
Less : Costs
(865,000)
Less: Depreciation [ $25,50,000 / 3 Years ]
(990,000)
Net Income Before Tax
315,000
Less : Tax at 35%
(110,250)
Net Income After Tax
204,750
Add Back : Depreciation
990,000
Annual Cash Flow
11,94,750
Year 0 Cash outflow [Initial Investment ] = $29,70,000 + 390,000 = $33,60,000
Year 1 Cash Flow = $11,94,750
Year 2 Cash Flow = $11,94,750
Year 3 Cash Flow = $11,94,750 + [ $390,000 *(1-0.35) ] + 255,000 = $1703250
Net Present Value [ NPV] = Present Value of Annual cash inflows – Initial Investments
= [ $11,94,750 x 0.91743 ] + [ $11,94,750 x 0.84170] + [ $17,03,250 x 0.77218 ] - $33,60,000
= $10,96,100.92 + 10,05,597.17 + 13,15,221.51 – 33,60,000
= $56,919.60
= $56,920 [ Rounded ]
Years
Cash Flow
Year 0
$33,60,000
Year 1
$11,94,750
Year 2
$11,94,750
Year 3
$1703250
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