Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. down under boomerang, inc., is considering a new t

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

Free

80.2K

Verified Solution

Question

Finance

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.

Answer & Explanation Solved by verified expert
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.     

Please thumbs up.
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

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.

Other questions asked by students

Q

A canned soup company wishes to design an optimal can for making a profit. The cost...

Basic Math
Q

Research a company that has exceptional performance with regard to inventory turns within its industry. Compare...

Operations Management
Q

Hydrochloric acid (HCl) reacts with sodium carbonate (Na2CO3), forming sodium chloride (NaCl), water (H2O), and carbon...

Chemistry
Q

A charged particle moves through a magnetic field in a direction perpendicular to it Then...

Physics
Q

80 2 Sines to find the indicated side x Assume a

Basic Math
Q

a Sketch the graph of the parametric curve x 2sht 2 y 3 cost 0sts...

Basic Math
Q

Assume that the U.S. Mint manufactures dollar coins so that the standard deviation is 0.0390...

Basic Math
Q

Decide whether the triangles can be proven congruent by the given postulates or theorem If...

Algebra
Q

Algebraically solve the system of equations shown below Note that you can use either factoring...

Algebra
Q

Caprl Company began the current period with a...

Accounting
Q

Bluecap Co. uses a standard cost system and flexible budgets for control purposes. The following...

Accounting
Q

1. As pressure increases, age increases 02 As age increases, pressure increases. 3. As age...

Accounting