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 $2.82 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,120,000 in annual sales, with costs of $815,000. The tax rate is 30 percent and the required return is 12 percent. The project requires an initial investment in net working capital of $340,000, and the fixed asset will have a market value of $230,000 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.) Years Cash Flow 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 $

Explanation / Answer

Down Under Boomerang Inc. All Amounts in $ Cash Flows, Yearwise (From Year 0 to Year 3) Year Initial Working Cash Sales Costs Net Residual Income post Investment Capital Outflow Income Value of Taxes Fixed Assets @ 70% 0 -2820000 -340000 -3160000 1 2120000 815000 1305000 913500 2 2120000 815000 1305000 913500 3 2120000 815000 1305000 230000 1143500 Required Return on Investment 12% Given this information, the Net Present Value or NPV of the Project works out to -$ 716,265.79

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