Down Under Boomerang, Inc., is considering a new three-year expansion project th
ID: 2774448 • Letter: D
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. Negative amounts should be indicated by a minus sign.)
What is the NPV?
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.
Explanation / Answer
Solution - To find the net cash flow & NPV we need to solve this problem with Capital Budgeting Technique of Cash Flow-
Few Things to Note -
1) Working Capital Required at the Start is assumed to be same at the end of three years
2) Sales of Fixed asset after three years is liable to Tax @ 30 %
Below is the calculation
Working Note - 1
Straight Line three-year depreciation
Working Note 2
1) What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3?
What is the NPV = Present Value of future Cash inflow ( Year 1 & 2 & 3 ) - Initial Outlay
= 3228083 -3160000 = $ 68083
Particulars Year 0 Year 1 Year 2 Year 3 Total Comment A Annual sales 21,20,000 21,20,000 21,20,000 63,60,000 B Annual Costs 8,15,000 8,15,000 8,15,000 24,45,000 C Depreciation 940000 940000 940000 28,20,000 ( Refer Working Note 1 ) D Earning Before Taxes ( A-B-C) 3,65,000 3,65,000 3,65,000 E Taxes ( 30 % of C) 109500 109500 109500 F EAT ( D -E) 2,55,500 2,55,500 2,55,500 7,66,500 G Operating Cash Flow ( F+B) 11,95,500 11,95,500 11,95,500 35,86,500 Add Back Depreciation H Initial fixed asset investment -28,20,000 Careful about the Signs I investment in net working capital -3,40,000 3,40,000 Recovered WC J Add Salvage Value 1,61,000 ( Refer Working Note 2 ) I Total Cash Flow ( H+I+J + G) -31,60,000 11,95,500 11,95,500 16,96,500 9,27,500 J PV Factor @ 12 % 1.0000 0.8929 0.7972 0.7118 Refer PV Discount Table K Present Value of future Cash Flow ( J X I ) -3160000 1067461.95 953052.6 1207568.7 68,083 NPVRelated Questions
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