# 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?

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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?
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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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