Down Under Boomerang, Inc., is considering a new 3-year expansion project that r

Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.106 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $163,800. The project requires an initial investment in net working capital of $234,000. The project is estimated to generate $1,872,000 in annual sales, with costs of $748,800. The tax rate is 30 percent and the required return on the project is 17 percent. The NPV for this project is $?

Explanation / Answer

Using the tax shield approach to calculating OCF, we get: OCF = (Sales – Costs)(1 – tC) + tCDepreciation OCF = ($2,400,000 – 960,000)(1 – 0.35) + 0.35($2,700,000/3) OCF = $1,251,000 So, the NPV of the project is: NPV = –$2,700,000 + $1,251,000(PVIFA15%,3) NPV = $156,314.62

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