Project Evaluation Using Net Present Value and Payback Period

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.55 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,030,000 in annual sales, with costs of $725,000. The tax rate is 35 percent and the required return is 15 percent. The project requires an initial investment in net working capital of $250,000, and the fixed asset will have a market value of $285,000 at the end of the project.

What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)

What is the NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Flatte Restaurant is considering the purchase of a $10,900 soufflé maker. The soufflé maker has an economic life of
four years and will be fully depreciated by the straight-line method. The machine will produce 2,450 soufflés per year, with each costing $3.00 to make and priced at $5.70. Assume that the discount rate is 12 percent and the tax rate is 34 percent.

What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Should the company make the purchase?

Maxwell Software, Inc., has the following mutually exclusive projects.

Year Project A Project B
Cash flow Cash flow
0 $(34,000) $(37,000)
1 19,000 20,000
2 15,500 14,000
3 4,300 15,500

a-1. Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)

a-2. Which, if either, of these projects should be chosen?

b-1. What is the NPV for each project if the appropriate discount rate is 16 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

b-2. Which, if either, of these projects should be chosen if the appropriate discount rate is 16 percent?