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16- Calculating Project NPV Down Under Boomerang, Inc., is considering a new three-year expansion project that...

16- Calculating Project NPV Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,400,000 in annual sales, with costs of $960,000. The tax rate is 35 percent and the required return is 15 percent. What is the project’s NPV? (20 Points) Hint: PVIFA = 1-(1+r)-N/r r is the period rate. N is payments or withdrawals.

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Answer #1
Annual cashflows:
Annual sales 2400000
Less: Aannual cost 960000
Less: Annual deprecication (2700000/3) 900000
Before tax incomoe 540000
Less: Tax @ 35% 189000
After tax Income 351000
Add: Depreciation 900000
Annual cashflows: 1251000
Multiply: Annuity PVF at 15% fr 3 yrs 2.2832
Present value of inflows 2856283
Less: Investment 2700000
Net present value 156283.2
Answer is $ 156,283
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