Question

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.73 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,090,000 in annual sales, with costs of $785,000. The tax rate is 21 percent and the required return is 13 percent. What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Net Present Value is equal to Present value of cash inflows less initial investment.

Given : Initial Investment = 2.73 million

Annual sales = 2090000 with Annual cost = 785000

Tax rate 13% and required rate = 13%

Calculate the After tax Annual savings

= (Sales - cost) x (1 - taxes)

= (2090000 - 785000) x (1 - 0.21)

= 1305000 x 0.79

= 1030950

Calculate Depreciation and Tax saving on depreciation

Depreciation = Investment cost / 3

= 2730000 / 3 = 910000

Tax saving = 910000 x 0.21 = 191100

Total after tax Cash inflows = 1030950 + 191100 = 1222050

Present value of Cash inflows = Annual after tax cash inflows x cumulative discounting factor @ 13% for 3 years

= 1222050 x 2.3611525 [ PV factor = (100/113) + (100/113)² + (100/113)³ or refer tables]

= 2885446.53

NPV = 2885446.53 - 2730000

NPV = + 155446.53