Question

Asked Nov 11, 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 $2.28 million. The fixed asset falls into the 3-year MACRS class (MACRS schedule). The project is estimated to generate $1,750,000 in annual sales, with costs of $652,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $300,000 at the end of the project. |

a. |
If the tax rate is 23 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? |

b. |
If the required return is 12 percent, what is the project's NPV? |

Step 1

The net present value is the true value of future cash flows. It is done by considering the time value of money at discounted rate.

Step 2

Given:

Initial cost of equipment= $2,280,000

Investment in NWC = $330,000

Salvage value = $300,000

Annual sales = $1,750,000

Annual fixed cost = $652,000

Project life = 3 years

Tax rate = 23%

Required rate of return = 12%

Step 3

Total initial cash outflows will be $ 2,610,000 ($2,280,000+ $330,000)

Firstly, cal...

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