Question

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,140,000 in annual sales, with costs of $823,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $240,000 at the end of the project. If the tax rate is 35 percent and the required return is 10 percent, what is the project’s Year 1 net cash flow? Year 2? Year 3? (Use MACRS) (A negative answer should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Years Cash Flow Year 0 $ Year 1 $ Year 2 $ Year 3 $ What is the project's NPV? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $

Answer 1

The Net cash flows and NPV are as below

Year	Initial cost	NWC	After tax net revenue	Taxshield on depreciation	After tax salvage	Net cash flow
0	-2,880,000	-360000				-3,240,000
1			856050	335966.4		1,192,016
2			856050	448056		1,304,106
3		360000	856050	149284.8	230692.8	1,596,028
					NPV	120,543.98

WORKINGS

Year	Depreciation
0
1	959904
2	1280160
3	426528
Total	2666592
Ending book value	213408
Salvage	240000
Gain	26592
Tax on gain	9307.2