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22 October, 02:32

Down under boomerang, inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 million. the fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. the project is estimated to generate $2,060,000 in annual sales, with costs of $755,000. the tax rate is 35 percent and the required return on the project is 13 percent. what is the project's npv?

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  1. 22 October, 02:45
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    To answer this problem, 1st let us calculate the total annual cash flow.

    We define the given variables:

    Annual Income = $2,060,000

    Annual Cost = $755,000

    Annual Profit = $2,060,000 - $755,000 = $1,305,000

    Annual Tax = $1,305,000 * 0.35 = $456,750

    Depreciation = $2.64 million / 3 = $880,000

    Savings from Depreciation = $880,000 * 0.35 = $308,000

    Therefore,

    Annual Cash Flow = Annual Profit + Savings from Depreciation

    Annual Cash Flow = $1,305,000 + $308,000

    Annual Cash Flow = $1,613,000

    The present value of annuity is:

    P = A [1 - (1 + i) ^-n ] / i

    P = $1,613,000 [1 - (1 + 0.13) ^ (-3) ] / 0.13

    P = $3,808,539.14 = NPV
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