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 $2.79 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 $2,110,000 in annual sales, with costs of $805,000. The tax rate is 35 percent and the required return is 12 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 $ Maxwell Software, Inc., has the following mutually exclusive projects. Year Project A Project B 0 –$18,000 –$21,000 1 11,000 12,000 2 7,500 8,500 3 2,700 7,500 a-1. Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) Payback period Project A years Project B years a-2. Which, if either, of these projects should be chosen? Project A Project B Both projects Neither project b-1. What is the NPV for each project if the appropriate discount rate is 16 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV Project A $ Project B $ b-2. Which, if either, of these projects should be chosen if the appropriate discount rate is 16 percent? Project A Project B Both projects Neither project

Explanation / Answer

Maxwell Software, Inc.,

Payback period of A,11000 out of 18000 is recovered in 1 years the rest in 7000/7500=.933 yrs thus the payback period is 1.933 years.

Payback period of B,12000+8500=20500 out of 21000 is recovered in 2 years the rest in 500/7500=.067 yrs thus the payback period is 2.067 years.

Project A should be choosen due to lower payback period.

Project B should be choosen due to higher positive NPV.

Wacc 12% TaxRate 35% Year(t) 0 1 2 3 Investment in equipment Investment 27,90,000 Total Sales S 21,10,000 21,10,000 21,10,000 Total cost C 8,05,000 8,05,000 8,05,000 Depreciation d=Investment/3 930000 930000 930000 EBIT S-C-d 3,75,000 3,75,000 3,75,000 OperatingCashFlows, (CFO=EBIT*(1-TaxRate)+d) 11,73,750 11,73,750 11,73,750 SalvageValue(MV) MV 0 Book Value(BV=Investment-Total Depreciation) BV=Investment-Total Depreciation 27,90,000 18,60,000 9,30,000 0 TerminalCF ,CFT MV-TaxRate*(MV-BV) 0 Initial Outlay,CFi (=-(Investment) -27,90,000 Net CashFlows/year, CF=CFO+CFT+Cfi -27,90,000 11,73,750 11,73,750 11,73,750 PV of Cash Flows (PV=CF/(1+ Wacc%)^t) -2790000 1047991.071 935706.3138 835452.0659 NPV(Sum of above PVs) (Sum of above PVs) $        29,149.45

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