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 $2.58 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,040,000 in annual sales, with costs of $735,000. The tax rate is 34 percent and the required return is 15 percent. The project requires an initial investment in net working capital of $260,000, and the fixed asset will have a market value of $280,000 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. A negative answer should be indicated by a minus sign.)

What is the NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Annual cash flows: Additional revennue 2040000 Less: Additional cost 735000 Less: Annual depreciation 766667 (2580000-280000)/3 Net Income before tax 538333 Less: Tax @34% 183033 Net income after tax 355300 Add: Depreciation 766667 Annual cash flows: 1121967 Net cash flows Year0 Year1 Year2 Year3 Initial investment -2580000 Working capital investment -260000 Annual cash inflows 1121967 1121967 1121967 Salvage value 280000 Working capital released 260000 Net cash flows -2840000 1121967 1121967 1661967 Req 2. Net Present value Year0 Year1 Year2 Year3 Initial investment -2580000 Working capital investment -260000 Annual cash inflows 1121967 1121967 1121967 Salvage value 280000 Working capital released 260000 Net cash flows -2840000 1121967 1121967 1661967 PVf @ 15% 1 0.869565 0.756144 0.657516 Present value of cashflows -2840000 975623.5 848368.2 1092770 NPV 76762

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.