Question

1. Down Under Boomerang, Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $1.4 million. The fixed asset will be depreciated straight line to zero over its three-year tax life, after which it will be worthless. You expect that you will be able to sell the fixed asset for $250.000 at the end of the three-year expansion project. If the tax rate is 35%, what are the after-tax proceeds from the sale of the fixed asset at the end of the third year? 2. Rising Star Inc is forecasting that their sales will increase by $250,000 next year, $275,000 the following year, and $300,000 in the third year. The company estimates that additional cash requirements will be 6% of the change in sales, inventory will increase by 5% of the change in sales, receivables will increase by 8% of the change in sales, and payables will increase by 10% of the increase in sales. Find the forecasted increase in net working capital for Rising Star over the next three years.

What is the solution for both?

Answer 1

PT 1

Fixed Asset will be depreciated straight line to zero , so after the project book value will be Nil.

Sale proceednet of tax =Sale proceed -(Sale proceed - Book value)*tax rate

=250000-(250000-0)*0.35 i.e. $162500

PT 2

	Y1	Y2	Y3
Change in sales	250000	275000	300000
Cash required	15000	16500	18000
Inventory	12500	13750	15000
Receivable	20000	22000	24000
Payable	-25000	-27500	-30000
Increase in Net working capital	22500	24750	27000