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?

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

43

step-by-step explanation:

21/58.

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