Involve initial investment in equipment

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Reference no: EM132018191

Fairfax Pizza is evaluating a 1-year project that would involve an initial investment in equipment of 27,100 dollars and an expected cash flow of 28,700 dollars in 1 year. The project has a cost of capital of 4.32 percent and an internal rate of return of 5.9 percent. If Fairfax Pizza were to use 27,100 dollars in cash from its bank account to purchase the equipment, the net present value of the project would be 411 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 27,100 dollars. If Fairfax Pizza were to borrow money to raise the 27,100 dollars, the interest rate on the loan would be 1.21 percent. Fairfax Pizza would receive 27,100 dollars from the bank at the start of the project and would pay 27,428 dollars to the bank in 1 year. What is the NPV of the project?

Reference no: EM132018191

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