Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.33 million. The fixed asset falls into the 3-year MACRS class (MACRS schedule). The project is estimated to generate $1,735,000 in annual sales, with costs of $640,000. The project requires an initial investment in net working capital of $300,000, and the fixed asset will have a market value of $255,000 at the end of the project.

a. If the tax rate is 25 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to two decimal places, e. g., 1,234,567.89.)

b. If the required return is 9 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to two decimal places, e. g., 1,234,567.89.)

Explanation: please refer to the explanation section

Initial fixed asset Investment = 2.33million = 2 330 000

Modified Accelerated Cost recovery System

The Fixed Asset Falls under the 3 year MACRS class the project the asset which states that Asset Depreciation range Midpoint is 4 years or less  The period for this project is 3 years

Estimated annual sales = $1735000

costs = $640,000

Initial Net working Capital  investment = $300,000

Residual Value (Value of the fixed asset at the end) = $255,000

a. Projected Cash flows

Year 0

Cash outflows = 2 330 000 - 300 000 - 255 000 = 2375000

                                year 1       year 2         year 3

Estimated sales17350001735000     1735000

costs                  -640000    -640000      -640000

Depreciation     -791666.67  -791666.67    -791666.67

Residual Value                     255000

Net sales          303333.33     303333.33  558333.33

Tax  25%  -75833.33-75833.33-139583.33

Net Cash flows  227500           227500              418750

Depreciation = (2330 00 + 300 000 -255000)/3= 791666.67

Tax =  Net sales x 25%

b Net Present Value (Required rate Return = 9%)

PV  =  227500/(1+0.09)^1 + 227500/(1 + 0.09)^2 + 418750/(1+0.09)^3

Present Value of cash flows = 723549.63

Net Present Value = 723549.63 - 2630 000 = -1906450.37

The net present Value is Negative indicating the project will not bring positive returns

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