Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.4 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 $2,050,000 in annual sales, with costs of $950,000. The project requires an initial investement in net working capital of $285,000 in year 0 which will be fully recovered at the end of the project's life. The tax rate is 35 percent and the required return is 12 percent.
a) What are the project's free cash flows in each year?
b) What is the project's NPV?
c) Calculate both project's payback period and the average accounting return.