Cash flows from capital spending

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Reference no: EM131067944

Fairfax Paint is evaluating a 2-year project that would involve buying equipment for 350,000 dollars that would be depreciated to 10,000 dollars over 2 years using straight-line depreciation. Cash flows from capital spending would be 0 dollars in year 1 and 15,000 dollars in year 2. To finance the project, Fairfax Paint would borrow 350,000 dollars. The firm would receive 350,000 dollars from the bank today and would pay the bank $0 in 1 year and 364,000 dollars in 2 years (consisting of an interest payment of 14,000 dollars and a principal payment of 350,000 dollars). Relevant annual revenues are expected to be 259,000 dollars in year 1 and 259,000 dollars in year 2. Relevant annual costs are expected to be 74,000 dollars in year 1 and 79,000 dollars in year 2. The tax rate is 50 percent. The cost of capital is 5.46 percent. What is the net present value of the project?

Reference no: EM131067944

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