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 $2.76 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,100,000 in annual sales, with costs of $795,000. The tax rate is 34 percent and the required return is 12 percent. The project requires an initial investment in net working capital of $320,000, and the fixed asset will have a market value of $220,000 at the end of the project. What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3?

Explanation / Answer

Answer:

Year 0 1 2 3 Investment cost (A) -2760000 Investment in Net working capital (B) -320000 Sale 2100000 2100000 2100000 Less: cost 795000 795000 795000 Less: Depreciation 920000 920000 920000 Earning before tax 385000 385000 385000 Less: tax 130900 130900 130900 Earning after tax 254100 254100 254100 Add: Dep 920000 920000 920000 OCF (C ) 1174100 1174100 1174100 Salvage value after tax (D) 145200 Release of Net working capital (E ) 320000 Cash Flows (A+B+C+D+E) -3080000 1174100 1174100 1639300

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