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 $2.73 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 $2,090,000 in annual sales, with costs of $785,000. The tax rate is 30 percent and the required return is 13 percent.

What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV $

Explanation / Answer

For calculating NPV of project we first need cash flows from project Calculating Project Cash Flows Amounts in $ Year 1 Year 2 Year 3 Annual Sales 2090000 2090000 2090000 Less: Cost of Goods Sold 785000 785000 785000 Less: Depreciation(2.73 Mn/3) 910000 910000 910000 Earning Before Tax 395000 395000 395000 Less: Tax @ 30% 118500 118500 118500 Earning after Tax 276500 276500 276500 Add: Depreciation 910000 910000 910000 Annual Cash Flows 1186500 1186500 1186500 Tutorial Note: Here we are first deducting depreciation to take benefit on tax cash outflows and again we are adding depreciation because depreciation in itself is not a cash item. Depreciation does not result in cash outflow Calculation of Project NPV Year Cash Flows Present Value Factor @13% Present Value 0 -2730000 1 -2730000.00 1 1186500 0.885 1050000.00 2 1186500 0.783 929203.54 3 1186500 0.693 822304.02 Net Present Value 71507.56

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