Down Under Boomerang, Inc., is considering a new three-year expansion project th

Question

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3 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 $2,180,000 in annual sales, with costs of $875,000. The tax rate is 30 percent and the required return is 9 percent.

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3 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 $2,180,000 in annual sales, with costs of $875,000. The tax rate is 30 percent and the required return is 9 percent.

Explanation / Answer

FCInv = 3,000,000          Depreciation = 1000000 per year     salvage value =0

Sales = 2,180,000             Costs = 875,000

Tax =30 %

Initial outlay = 3000000

After tax Operating cash flow each year = (S-C) * (1-T) + D * T

                                                               = (2,180,000 - 875,000 ) (1-0.3) + 1000000 * 0.3

                                                               = 1,213,500

TNOCF = Terminal Non Operating Cash Flow = 0

NPV = -3000000 + 1213500 * [1/(1.09) + 1/(1.09)2 + 1/(1.09)3]

         = $ 71726.077

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.