own Under Boomerang, Inc., is considering a new three-year expansion project tha
ID: 2742589 • Letter: O
Question
own Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 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 $2,140,000 in annual sales, with costs of $835,000. The tax rate is 35 percent and the required return is 10 percent.
own Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 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 $2,140,000 in annual sales, with costs of $835,000. The tax rate is 35 percent and the required return is 10 percent.
Explanation / Answer
Sales – Cost= 2,140,000-835,000= $1,305,000
Less Tax @ 35% $456,750
----------------
$848,250
Add: Depreciation $960,000
---------------
Cash flow $1,808,250
Depreciation= $2,880,000/3=$960,000
New Project
year
Cash flow
Cost
Net Cash flow
PV Factor @ 10%
PV
0
(2,880,000)
(2,880,000)
1.0000
(2,880,000.00)
1
1,808,250
1,808,250
0.9091
1,643,863.64
2
1,808,250
1,808,250
0.8264
1,494,421.49
3
1,808,250
1,808,250
0.7513
1,358,564.99
NPV
1,616,850.11
NPV=1,616,850.11
New Project
year
Cash flow
Cost
Net Cash flow
PV Factor @ 10%
PV
0
(2,880,000)
(2,880,000)
1.0000
(2,880,000.00)
1
1,808,250
1,808,250
0.9091
1,643,863.64
2
1,808,250
1,808,250
0.8264
1,494,421.49
3
1,808,250
1,808,250
0.7513
1,358,564.99
NPV
1,616,850.11
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