Down Under Boomerang, Inc., is considering a new three-year expansion project th
ID: 2736561 • Letter: D
Question
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.91 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 $2,150,000 in annual sales, with costs of $845,000. The tax rate is 30 percent and the required return is 11 percent.
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.91 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 $2,150,000 in annual sales, with costs of $845,000. The tax rate is 30 percent and the required return is 11 percent.
Explanation / Answer
Reference No
Particulars
Amount
A
Sales
2150000
B
Cost
845000
C=A-B
Gross Profit
1305000
D
After Tax Rate(100-30)
70%
E=C*D
Annual Cash Flow
913500
F
Fixed Asset
2910000
G
No of Years
3
H=F/G
Depreciation
970000
I
Tax Rate
30%
J=H*I
Annual Tax Saving from Depreciation
291000
K=E+J
Total Annual Cash Flow
1204500
L
No of Years
3
M
Rate of Return
11%
N
Annuity Factor
2.443715
O=K*N
PV of Annuity
2943454
P
Fixed Asset
2910000
Q=P-O
NPV
-33454
Reference No
Particulars
Amount
A
Sales
2150000
B
Cost
845000
C=A-B
Gross Profit
1305000
D
After Tax Rate(100-30)
70%
E=C*D
Annual Cash Flow
913500
F
Fixed Asset
2910000
G
No of Years
3
H=F/G
Depreciation
970000
I
Tax Rate
30%
J=H*I
Annual Tax Saving from Depreciation
291000
K=E+J
Total Annual Cash Flow
1204500
L
No of Years
3
M
Rate of Return
11%
N
Annuity Factor
2.443715
O=K*N
PV of Annuity
2943454
P
Fixed Asset
2910000
Q=P-O
NPV
-33454
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