Involve an initial investment in equipment

Assignment Help Financial Management

Reference no: EM132018126

Fairfax Pizza is evaluating a 1-year project that would involve an initial investment in equipment of 27,400 dollars and an expected cash flow of 28,600 dollars in 1 year. The project has a cost of capital of 2.74 percent and an internal rate of return of 4.38 percent. If Fairfax Pizza were to use 27,400 dollars in cash from its bank account to purchase the equipment, the net present value of the project would be 436 dollars. However, Fairfax Pizza has no cash in its bank account, so using money from its account is not possible. Therefore, the firm would need to borrow money to raise the 27,400 dollars. If Fairfax Pizza were to borrow money to raise the 27,400 dollars, the interest rate on the loan would be 2 percent. Fairfax Pizza would receive 27,400 dollars from the bank at the start of the project and would pay 27,948 dollars to the bank in 1 year. What is the NPV of the project?

Reference no: EM132018126

Questions Cloud

Long position for stock index futures contract : Smith holds a long position for a Stock index futures contract which is four months from maturity.

Require the purchase of piece of equipment : Gomi Waste Disposal is evaluating a project that would require the purchase of a piece of equipment for 129,000 dollars today.

What is the liquidity premium : What is the liquidity premium to make them indifferent between the three year bond or getting a two year bond, then a one year bond after?

Maximum initial investment would make project acceptable : Fairfax Pizza is evaluating a project that would cost 96,000 dollars today. What maximum initial investment would make the project acceptable?

Involve an initial investment in equipment : Fairfax Pizza is evaluating a 1-year project that would involve an initial investment in equipment of 27,400 dollars and an expected cash flow of 28,600 dollars

What is the aftertax salvage value of the equipment : The company's tax rate is 40 percent. What is the aftertax salvage value of the equipment?

Potential conflicts between stockholders and bondholders : Which of the following actions would be most likely to reduce potential conflicts between stockholders and bondholders?

What is the payback period for project : The cost of capital of the project is 9.09 percent. What is the payback period for the project?

Why do we use an after tax figure for cost of debt : Calculate the weighted average cost of capital (WACC) for DSI. Why do we use an after tax figure for the cost of debt but not for the cost of equity?

User Account

All Pages