Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset falls into the 3-year MACRS class (MACRS schedule). The project is estimated to generate $1,715,000 in annual sales, with costs of $624,000. The project requires an initial investment in net working capital of $260,000, and the fixed asset will have a market value of $195,000 at the end of the project.  a.If the tax rate is 21 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.)

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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 $2.29 million. The fixed asset falls into the 3-year MACRS class (MACRS schedule). The project is estimated to generate $1,715,000 in annual sales, with costs of $624,000. The project requires an initial investment in net working capital of $260,000, and the fixed asset will have a market value of $195,000 at the end of the project.

  

a. If the tax rate is 21 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.)

 

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Expert Answer

Step 1

a.)

Computation of net cash flows of year 0 to year 3:

Annual pre-tax cash flow = Sales - cost
=$1,715,000 $624,000
= $1,091,000
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Annual pre-tax cash flow = Sales - cost =$1,715,000 $624,000 = $1,091,000

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Step 2

The cash outflow is as follows:

F23
F
A
B
C
D
E
G
H
Cash outflow
12
Year Depreciation rateCash flows Depreciation (MACR 3-year)
0.3333 1091000
0.4445 1091000
0.1481 1091000
Cash out flow
1022173.97
1075650.05
ЕВT
Тах
PAT
13
-763257
-1017905
-339149
258916.97
57745.05
593962 29
327743
73095
751851
1
-68826.03
14
-15349.95
15
-157888.71
93311129
16
17
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F23 F A B C D E G H Cash outflow 12 Year Depreciation rateCash flows Depreciation (MACR 3-year) 0.3333 1091000 0.4445 1091000 0.1481 1091000 Cash out flow 1022173.97 1075650.05 ЕВT Тах PAT 13 -763257 -1017905 -339149 258916.97 57745.05 593962 29 327743 73095 751851 1 -68826.03 14 -15349.95 15 -157888.71 93311129 16 17

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Step 3

Working note:

...
F23
B
C
D
F
G
A
E
н
Cash outflow
12
Depreciation rate Cash flows Depreciation (MACR 3-year)
0.3333
0.4445
0.1481
Year
ЕВIT
Тах
PAT
E14+ F14
-E15+F15
-E16+ F16
Cash out flow
G14-D14
|-G15-D15
G16-D16
13
|=E3*B14
-E3 B15
E3 B16
BS
B8
=BS
|=SUM(C14D14)--E14*B4
|-SUM(C15D15)E15-B4
-SUM(C16D16 E16 B4
14 1
15 2
16 3
17
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F23 B C D F G A E н Cash outflow 12 Depreciation rate Cash flows Depreciation (MACR 3-year) 0.3333 0.4445 0.1481 Year ЕВIT Тах PAT E14+ F14 -E15+F15 -E16+ F16 Cash out flow G14-D14 |-G15-D15 G16-D16 13 |=E3*B14 -E3 B15 E3 B16 BS B8 =BS |=SUM(C14D14)--E14*B4 |-SUM(C15D15)E15-B4 -SUM(C16D16 E16 B4 14 1 15 2 16 3 17

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