Question

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.46 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 $2,000,000 in annual sales, with costs of $695,000. The tax rate is 35 percent and the required return is 16 percent. What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV           $

Answer 1

Annual depreciation = 2,460,000 / 3 = $820,000

Operating cash flow = (Sales - costs - depreciation)(1 - tax) + depreciation

Operating cash flow = (2,000,000 - 695,000 - 820,000)(1 - 0.35) + 820,000

Operating cash flow = $1,135,250

NPV = Present value of cash inflows - present value of cash outflows

NPV = Annuity * [1 - 1 / (1 + r)ⁿ] / r - Initial investment

NPV = 1,135,250 * [1 - 1 / (1 + 0.16)³] / 0.16 - 2,460,000

NPV = 1,135,250 * 2.24589 - 2,460,000

NPV = $89,646.10