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 $2.268 million. The fixed asset falls into the 3-year MACRS class (MACRS Table). The project is estimated to generate $2,016,000 in annual sales, with costs of $806,400. The tax rate is 33 percent and the required return is 18 percent. The project requires an initial investment in net working capital of $252,000 and the fixed asset will have a market value of $176,400 at the end of the project.

What is the NPV for the project?

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.268 million. The fixed asset falls into the 3-year MACRS class (MACRS Table). The project is estimated to generate $2,016,000 in annual sales, with costs of $806,400. The tax rate is 33 percent and the required return is 18 percent. The project requires an initial investment in net working capital of $252,000 and the fixed asset will have a market value of $176,400 at the end of the project.

What is the NPV for the project?

Explanation / Answer

NPV = (1209600*0.67)/1.18 + (1209600*0.67)/(1.18)^2 + (1209600*0.67)/(1.18)^3 + (755244*0.33)/1.18 + (1009260*0.33)/(1.18)^2 + (335664*0.33)/(1.18)^3 +252000/(1.18)^3+ (176400 -(176400-167832)*0.33)/(1.18)^3 - 2268000 %u2013 252000

= $18942.26

NPV for the project = $18942.26

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