What is the net present value of the project

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Reference no: EM132002191

Fairfax Paint is evaluating a 2-year project that would involve buying equipment for 100,000 dollars that would be depreciated to 20,000 dollars over 2 years using straight-line depreciation. Cash flows from capital spending would be 0 dollars in year 1 and 34,000 dollars in year 2. To finance the project, Fairfax Paint would borrow 100,000 dollars. The firm would receive 100,000 dollars from the bank today and would pay the bank $0 in 1 year and 112,200 dollars in 2 years (consisting of an interest payment of 12,200 dollars and a principal payment of 100,000 dollars). Relevant annual revenues are expected to be 84,000 dollars in year 1 and 88,000 dollars in year 2. Relevant annual costs are expected to be 23,000 dollars in year 1 and 32,000 dollars in year 2. The tax rate is 50 percent. The cost of capital is 8.74 percent and the interest rate on the loan would be 5.92 percent. What is the net present value of the project?

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Reference no: EM132002191

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