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 $2.46 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,000,000 in annual sales, with costs of $711,000. The project requires an initial investment in net working capital of $220,000, and the fixed asset will have a market value of $300,000 at the end of the project If the tax rate is 35 percent and the required return is 16 percent, what is the project's Year 1 net cash flow? Year 2? Year 3? (Use MACRS) (A negative answer should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Cash Flow Years Year 0 Year 1 Year 2 Year 3 $ -2680000 $ 1124821 $ 1220565 What is the project's NPV? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV

Explanation / Answer

1644850 is the third year cash flow and 179430.84 is the NPS. Working shown below Year 0 1 2 3 Initial Fixed Asset -2460000 0 0 300000 Working Capital -220000 220000 Sales 0 2000000 2000000 2000000 Cost 711000 711000 711000 Sales-Cost 1289000 1289000 1289000 Depreciation -820000 -820000 -820000 Profit before Tax 469000 469000 469000 Tax @ 35% 164150 164150 164150 Profit after Tax 304850 304850 304850 Add Back Depreciation 820000 820000 820000 Cash Flow 1124850 1124850 1124850 Total Cash Flow for the Year -2680000 1124850 1124850 1644850 PV of Cash Flow at 16% discount rate -2680000 969698.3 835946.8 1053786 NPV $179,430.84

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