Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.3 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,720,000 in annual sales, with costs of $630,000. The project requires an initial investment in net working capital of $270,000, and the fixed asset will have a market value of $210,000 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? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)b.If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)     a.  whar are Years 0,1,2,3 cash flow seperatelyb.  What is the NPV

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Asked Oct 28, 2019
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Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.3 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,720,000 in annual sales, with costs of $630,000. The project requires an initial investment in net working capital of $270,000, and the fixed asset will have a market value of $210,000 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? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)
b.

If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 

    a.  whar are Years 0,1,2,3 cash flow seperately

b.  What is the NPV

 

 
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Expert Answer

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Step 1

The initial investment cost of store is $2,300,000.

According to straight line depreciation, the annual depreciation is calculated below:

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Initial investment cost Annual depreciation Asset life $2,300,000 3 =$766,666.67

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Step 2

a.

Cash outflow at the beginning of project is calculated below:

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Required addi tional working capital Cash outlfow Initial investment cost $2,300,000+$270, 000 $2,570,000

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Step 3

When calculating operating gross profit, depreciation is deducted from revenue which will decrease the cash flow. So, it is needed to add b...

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(Annual revenue -Costs -Depreciation x(1-Tax rate) Annual operating cash flow = | +Depreciation (S1,720,000-$630, 000-$766,666.67) (1-0.22) +$766,666.67 = ($323,333.33 x 0.78) + $766, 666.67 =$252, 200+ $766, 666.67 $1,018,866.67

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