The interest rate on the loan-what is the net present value

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Reference no: EM132033117

Fairfax Paint is evaluating a 2-year project that would involve buying equipment for 240,000 dollars that would be depreciated to 50,000 dollars over 2 years using straight-line depreciation. Cash flows from capital spending would be 0 dollars in year 1 and 64,000 dollars in year 2. To finance the project, Fairfax Paint would borrow 240,000 dollars. The firm would receive 240,000 dollars from the bank today and would pay the bank $0 in 1 year and 261,168 dollars in 2 years (consisting of an interest payment of 21,168 dollars and a principal payment of 240,000 dollars). Relevant annual revenues are expected to be 224,000 dollars in year 1 and 198,000 dollars in year 2. Relevant annual costs are expected to be 50,000 dollars in year 1 and 78,000 dollars in year 2. The tax rate is 50 percent. The cost of capital is 8.59 percent and the interest rate on the loan would be 4.32 percent. What is the net present value of the project?

Reference no: EM132033117

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