Fairfax Paint is evaluating a 2-year project that would involve buying equipment
ID: 2760866 • Letter: F
Question
Fairfax Paint is evaluating a 2-year project that would involve buying equipment for 360,000 dollars that would be depreciated to 40,000 dollars over 2 years using straight-line depreciation. Cash flows from capital spending would be 0 dollars in year 1 and 46,000 dollars in year 2. To finance the project, Fairfax Paint would borrow 360,000 dollars. The firm would receive 360,000 dollars from the bank today and would pay the bank $0 in 1 year and 378,000 dollars in 2 years (consisting of an interest payment of 18,000 dollars and a principal payment of 360,000 dollars). Relevant annual revenues are expected to be 254,000 dollars in year 1 and 262,000 dollars in year 2. Relevant annual costs are expected to be 112,000 dollars in year 1 and 74,000 dollars in year 2. The tax rate is 50 percent. The cost of capital is 7.07 percent. What is the net present value of the project? the answer is -27,065.42 i just need the solution to get there Thanks.
Explanation / Answer
Year Investment$(a) Cash Inflow$ (b) Borrow$(c) Loan repay$(d) Net Operating cash flows$(e) Total net cash flow$ After tax net cashflow Tax shield of Depreciation 50% Toatl PVIF @7.07% Discounted cashflow 0 (360,000) 360,000 - - - 1.0000 - 1 - - - - 142,000 142,000 71,000 (20,000) 51,000 0.9340 47,632 2 - 46,000 - (378,000) 188,000 (144,000) (72,000) (20,000) (92,000) 0.8723 (80,251) year Revenue$ cost$ Net Operating cash flows$ 1 254000 112000 142000 2 262000 74000 188000 (32,619)
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