Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed...

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Down Under Boomerang, Inc., is considering a new three-yearexpansion project that requires an initial fixed asset investmentof $2.7 million. The fixed asset will be depreciated straight-lineto zero over its three-year tax life, after which it will beworthless. The project is estimated to generate $2,400,000 inannual sales, with costs of $960,000. The tax rate is 35 percentand 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 ispayments or withdrawals.

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3.8 Ratings (383 Votes)

Initial investment =    2700000
Time (N) =   3
Required return (r) = 15% or   0.15



Calculation of annual cash flows
Annual sales 2400000
less: cost -960000
less : Depreciation -900000
(2700000/3)

Profit before tax 540000
less : tax@35% -189000

Profit after tax 351000
Add: Depreciation 900000

Annual cash flows 1251000

Present value of Cash inflows (PVIFA) =1-(1+r)-N/r or

Annual amount * (1-(1/(1+r)^n) / r
=1251000 * (1-(1/(1+0.15)^3))/0.15
=2856314.622

NPV = Present value of cash inflow-initial investment
2856314.622 -2700000

=156314.6215

So, NPV of investment is $156,314.62. So project is acceptable.

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Transcribed Image Text

Down Under Boomerang, Inc., is considering a new three-yearexpansion project that requires an initial fixed asset investmentof $2.7 million. The fixed asset will be depreciated straight-lineto zero over its three-year tax life, after which it will beworthless. The project is estimated to generate $2,400,000 inannual sales, with costs of $960,000. The tax rate is 35 percentand 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 ispayments or withdrawals.