FIN 571 TUTOR Imagine Your Future /fin571tutor.com FIN 571 TUTOR Imagine Your Future /fin571tutor.co | Page 80

8.Down Under Boomerang, Inc., is considering a new three-year expansion
project that requires an initial fixed asset investment of $2.82 million. The
fixed asset will be depreciated straight-line to zero over its three-year tax
life, after which it will be worthless. The project is estimated to generate
$2,120,000 in annual sales, with costs of $815,000. The tax rate is 30
percent and the required return is 12 percent.
What is the project’s NPV? (Do not round intermediate calculations and
round your answer to 2 decimal places, e.g., 32.16.)
9.The Best Manufacturing Company is considering a new investment.
Financial projections for the investment are tabulated here. The corporate
tax rate is 35 percent. Assume all sales revenue is received in cash, all
operating costs and income taxes are paid in cash, and all cash flows occur
at the end of the year. All net working capital is recovered at the end of the
project.
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FIN 571 Week 5 DQ 1
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Because the weighted average is always a correct measure of a
required return, why do firms not create securities to finance
each project and offer them in the capital market in order to
accurately determine the required return for the project?