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 falls into the three-year MACRS class. The project is estimated to generate $2,000,000 in annual sales, with costs of $711,000. The project requires an initial investment in net working capital of $220,000, and the fixed asset will have a market value of $300,000 at the end of the project. If the tax rate is 35 percent and the required return is 16 percent, what is the project’s Year 1 net cash flow? Year 2? Year 3? (
(Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
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Answer
We have been provided with the information as follow
| Initial Investment | 2,460,000 |
| Add: Working Capital Requires | 220,000 |
| Depriciation method | three-year MACRS |
| Sales | 2,000,000 |
| Less: | |
| Variable Cost | 711,000 |
| Contrbution | 1,289,000 |
| Less: 35% tax | 451150 |
| Cash Flow | 837,850 |
Now first of all we will calculate Depreciation and Depreciation Tax Shield as follow,
| Year | Assets Valu | Dep. Rate |
Depriciation | Dep. Tax Shield |
| 1 | 2,460,000 | 33.33% | 819918 | 286971.3 |
| 2 | 2,460,000 | 44.45% | 1093470 | 382714.5 |
| 3 | 2,460,000 | 14.81% | 364326 | 127514.1 |
When company sale the machine that time cash flow would be as follow,
| Salvage Value | 300,000 |
| Less : 35% tax (300,000-182286) |
41200 |
| Net Cash Flow | 258,800 |
Now we will compute NPV as follow
| Year | Cash Flow | Dep. Tax Shield |
Realese of Working Capital |
Salvage Recipt |
Net Cash Flow |
PV Factor@16% | Prasent Value |
| 0 | -2,680,000 | -2,680,000 | 1 | -2680000 | |||
| 1 | 837850 | 286971.3 | 1,124,821 | 0.862069 | 969673.5 | ||
| 2 | 837850 | 382714.5 | 1,220,565 | 0.743163 | 907078.3 | ||
| 3 | 837850 | 127514.1 | 220,000 | 258,800 | 1,444,164 | 0.640658 | 925214.8 |
| 121966.6 |
