Fairfax Paint is evaluating a 2-year project that would involve buying equipment

Question

Fairfax Paint is evaluating a 2-year project that would involve buying equipment for 380,000 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 63,000 dollars in year 2. To finance the project, Fairfax Paint would borrow 380,000 dollars. The firm would receive 380,000 dollars from the bank today and would pay the bank $0 in 1 year and 429,400 dollars in 2 years (consisting of an interest payment of 49,400 dollars and a principal payment of 380,000 dollars). Relevant annual revenues are expected to be 346,000 dollars in year 1 and 306,000 dollars in year 2. Relevant annual costs are expected to be 78,000 dollars in year 1 and 79,000 dollars in year 2. The tax rate is 50 percent. The cost of capital is 9.42 percent. What is the net present value of the project?

Explanation / Answer

initial investment :

Initial Equipment Cost or Cash Outflows at 0 Year= $ 3,80,000

Inflows from the Project ($)

Computation of NPV:

Net Present Value = Present Value of Cash Inflows - Present Value of Cash Outflows

  

The Net Present value of the Project is : $ (159,174). i.e this project is generating less than 9.42%.

Explanation Year1 year2 a) Revenue 3,46,000 306000 b) costs 78,000 79000 c) Profit Before Depreciation & Tax (a-b) 268000 227,000 d) Depreciation 50,000 50,000 e) Profit before Tax (c-d) 218,000 177,000 f) Tax 50% 109,000 88,500 g) Depreciation ((f+d) 50,000 50,000 h) Cash flows after Tax (CFAT) 159,000 138,500

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.