Fairfax Pizza sells pizza in Northern Virginia and is evaluating the stadium pro
ID: 2757231 • Letter: F
Question
Fairfax Pizza sells pizza in Northern Virginia and is evaluating the stadium project, which would involve selling pizza in the baseball stadium for 2 years, starting today. Based on the following information, what is the net present value of the stadium project? The project would involve an initial investment in equipment of 85,000 dollars today. Cash flows from capital spending would be 0 dollars in year 1 and 20,000 dollars in year 2. To finance the project, Fairfax Pizza would borrow 85,000 dollars. The firm would receive 85,000 dollars from the bank today and would pay the bank 91,800 dollars in 2 years (consisting of an interest payment of 6,800 dollars and a principal payment of 85,000 dollars). There would be no loan payments in 1 year. Operating cash flows are expected to be 58,650 dollars in year 1 and 51,000 dollars in year 2. The tax rate is 45 percent. The cost of capital is 7.47 percent.
Explanation / Answer
Fairfax Pizza All Amounts in $ Operating Cash Flows yearwise Year 1 Year 2 Operating Cash Flows 58650 51000 Interest on Loan 6800 Profit before Taxes 58650 44200 Tax Impact @ 45% 26393 19890 Profit Post Taxes 32258 24310 Based on the information given, the Net Present Value (NPV) of the project is worked out as -$ 113,648.70.
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