Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.28 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,750,000 in annual sales, with costs of $660,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $300,000 at the end of the project.

 

a. If the tax rate is 23 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)
b.

If the required return is 12 percent, what is the project's NPV(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 

    

 
Expert Solution
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Step 1

Data given:

Initial fixed asset investment = $2.28 *1000000=$2,280,000

n= 3 year

Annual sales=$1,750,000 

Costs = $660,000

Initial investment in net working capital = $330,000

Salvage value= $300,000

 

Working Note #1

Calculation of depreciation:

Depreciation=Cost of asset - Salvage valueUseful life

Depreciation=($2,280,000 - $0) / 3

Depreciation=$760,000

 

Working Note #2

Calculation of disposal of assets:

Market value of asset =$300,000

Less: Book value        =$0

Capital gain                = $300,000

Tax @ 23%                  = $ 69000

Disposal of asset         =Sales value-Tax= $231,000

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