Again, please note that the FIN 571 Week 5 Concept Problem has been changed from
ID: 2742972 • Letter: A
Question
Again, please note that the FIN 571 Week 5 Concept Problem has been changed from the original numbers.
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8. value: 20.00 points 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 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 $
9. value: 20.00 points Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.58 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,040,000 in annual sales, with costs of $735,000. The tax rate is 34 percent and the required return is 15 percent. The project requires an initial investment in net working capital of $260,000, and the fixed asset will have a market value of $280,000 at the end of the project.
What is the project's
Year 0 net cash flow0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)
Years Cash Flow
Year 0 $
Year 1 $
Year 2 $
Year 3 $ ________________________________________
What is the NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
NPV $
Explanation / Answer
Question 8) NPV = Present Value of Cash inflows - Present Value of Cash Outflow
Calculation of Operating Cash Flows for each of Year 1 to 3
Sales
(-) Cost of goods sold
2000000
695000
Earnings before depreciation
(-) Depreciation [2460000 / 3]
1305000
820000
Earnings before tax
(-) Tax @ 35 %
485000
169750
Earnings after Tax
(+) Depreciation
315250
820000
Present Value of Cash inflow = 1135250 * Cumulative Present Value Factor for Three Years @ 16 %
= 1135250 * 2.2459
= $ 2549657.98 (approx)
Present Value of Cash outflow = $ 2.46 Million = $ 2.46 * 1000000 = $ 2460000
The NPV of Project = 2549657.98 - 2460000 = $ 89657.98 (approx)
Conclusion:- The Project's NPV = $ 89657.98 (approx)
Particulars Amount (In dollars)Sales
(-) Cost of goods sold
2000000
695000
Earnings before depreciation
(-) Depreciation [2460000 / 3]
1305000
820000
Earnings before tax
(-) Tax @ 35 %
485000
169750
Earnings after Tax
(+) Depreciation
315250
820000
Operating Cash Flow 1135250