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antiseptic1488 [7]
2 years ago
13

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.)
Business
1 answer:
Sedbober [7]2 years ago
5 0

Answer:

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 sales 1735000 1735000     1735000

costs                  -640000    -640000      -640000

Depreciation     -791666.67  -791666.67    -791666.67

Residual Value<u>                     255000 </u>

Net sales          303333.33     303333.33  558333.33

Tax  25%  -<u>75833.33 -75833.33 -139583.33</u>

Net Cash flows  <u>227500           227500              418750</u>

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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Find the detailed answer below

Explanation:

January 1     300 units at $5      $1,500

January 8     500 units at $9       $4,500

January 29 910 units at $10       $9,100

1,110 units are available at the end of the month. That means 600 units were sold

A. Under FIFO

1. Cost of goods available for sale:

        $1,500 + $4,500 + $9,100 = $15,100

2.   Cost of goods sold

         300 units at $5      $1,500

         300 units at $9      $2,700

          Total             $4,200

3. Ending inventory

           200 units at $9       $1,800

           910 units at $10      $9,100

           Total              $10,900

B. Under LIFO(Last in First Out)

1.  Cost of goods available for sale:

        $1,500 + $4,500 + $9,100 = $15,100

2.  Cost of goods sold

        600 units at $10      $6,000

        Total       $6,000

3. Ending inventory

       310 units at $10      $3,100

      500 units at $9        $4,500

      300 units at $5        $1,500

      Total        $9,100

C. Weighted average cost flow assumption: Cost of goods available for sale / total units

1. Cost of goods available for sale:

     $1,500 + $4,500 + $9,100 = $15,100

2. Cost of goods sold

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3. Ending inventory

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Under perpetual Inventory System

Between January 9 and January 28. The prevailing price that will be used to sell the inventory will be the price at January 8($9)

1. Cost of goods available for sale:

$1,500 + $4,500 + $9,100 = $15,100

2.  Cost of goods sold

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        Total           $5,400

3. Ending inventory

       1,110 units at $9      $9,990

      Total            $9,990

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