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3 Jun 2019

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?

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Reid Wolff
Reid WolffLv2
4 Jun 2019

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