Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.45 million. The fixed asset falls into the 3-year MACRS class (MACRS schedule). The project is estimated to generate $1,795,000 in annual sales, with costs of $688,000. The project requires an initial investment in net working capital of $420,000, and the fixed asset will have a market value of $435,000 at the end of the project.

  

a.	If the tax rate is 22 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.)
b.	If the required return is 9 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.)

    

Answer 1

Sales value of assets			435000
Book value (2450000*7.41%)			181545
Gain on sale			253455
Tax on Gain			55760.1
Afterr tax salveg			379239.9
Annual cashflows
		0	1	2	3
Annual sales			1795000	1795000	1795000
Annual cost			688000	688000	688000
Annual dep			816585	1089025	362845
Income bfore tax			290415	17975	744155
Less: Tax @ 22%			63891.3	3954.5	163714.1
After tax Income			226523.7	14020.5	580440.9
Add: Dep			816585	1089025	362845
Annual Operating CF			1043109	1103046	943285.9
Initial investment		-2450000
Investment in WC		-420000
Release of WC					420000
After tax Salvage					379240
Cashflows		-2870000	1043109	1103046	1742526
PVF at 9%		1	0.917431	0.84168	0.772183
Present Value		-2870000	956980.7	928411.7	1345550
NPV		360942