Down Under Boomerang, Inc., is considering a new 4-year expansion project that requires an initial fixed asset investment of $4,212,000. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will be worthless. The project is estimated to generate $3,744,000 in annual sales, with costs of $1,497,600. The tax rate is 34 percent and the required return is 17 percent, the NPV for this project is $
Initial Investment = $4,212,000
Useful Life = 4 years
Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $4,212,000 / 4
Annual Depreciation = $1,053,000
Annual Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax *
Depreciation
Annual Operating Cash Flow = ($3,744,000 - $1,497,600) * (1 - 0.34)
+ 0.34 * $1,053,000
Annual Operating Cash Flow = $2,246,400 * 0.66 + 0.34 *
$1,053,000
Annual Operating Cash Flow = $1,840,644
Required return = 17%
NPV = -$4,212,000 + $1,840,644/1.17 + $1,840,644/1.17^2 +
$1,840,644/1.17^3 + $1,840,644/1.17^4
NPV = -$4,212,000 + $1,840,644 * (1 - (1/1.17)^4) / 0.17
NPV = -$4,212,000 + $1,840,644 * 2.743235
NPV = $837,319.04
So, the NPV of this project is $837,319.04
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