Fairfax Paint is evaluating a 2-year project that would involve buying equipment
ID: 2732708 • Letter: F
Question
Fairfax Paint is evaluating a 2-year project that would involve buying equipment for 270,000 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 26,000 dollars in year 2. To finance the project, Fairfax Paint would borrow 270,000 dollars. The firm would receive 270,000 dollars from the bank today and would pay the bank $0 in 1 year and 280,800 dollars in 2 years (consisting of an interest payment of 10,800 dollars and a principal payment of 270,000 dollars). Relevant annual revenues are expected to be 222,000 dollars in year 1 and 220,000 dollars in year 2. Relevant annual costs are expected to be 57,000 dollars in year 1 and 87,000 dollars in year 2. The tax rate is 50 percent. The cost of capital is 5.62 percent. What is the net present value of the project?Explanation / Answer
Calculation of Net Present Value
Working Note : 1
Calculation of Deprecation :
Calculation Of Cash Inflow
Calculation Of Cash outflow
Net Present Value = PV of Cash Inflow - PV of Cash Outflow
= 257762.40 - 293306.70
= - 35544.30
Calculation of Net Present Value
Working Note : 1
Calculation of Deprecation :
Cost of Project 270000 Scrap Value 20000 Life 2 Years Deprecation = ( Cost - Scrap Value ) / Life = (270000 - 20000)/2 = 125000Related Questions
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