What is the net present value of the flier project, which is a 3-year project where Dispersion would spread fliers all over Fairfax?  The project would involve an initial investment in equipment of $570,000 today.  To finance the project, Dispersion would borrow $570,000.  The firm would receive $570,000 from the bank today and would pay the bank $640,000 in 3 years (consisting of an interest payment of $70,000 and a principal payment of $570,000).  Cash flows from capital spending would be $0 in year 1, $0 in year 2, and $184,000 in year 3.  Operating cash flows are expected to be $215,000 in year 1, -$60,000 in year 2, and ­$321,000 in year 3.  The cash flow effects from the change in net working capital are expected to be ‑$40,000 at time 0; $30,000 in year 1; -$10,000 in year 2, and $20,000 in year 3.  The tax rate is 15 percent.  The cost of capital is 5.08 percent and the interest rate on the loan would be 3.94 percent.   2. What is the NPV of the mall project?  The project would require an initial investment in equipment of $600,000 and would last for either 3 years or 4 years (the date when the project ends will not be known until it happens and that will be when the equipment stops working in either 3 years from today or 4 years from today).  The first annual operating cash flow of $238,000 is expected in 1 year, and annual operating cash flows of $238,000 per year are expected each year until the project ends in either 3 years or 4 years.  In 1 year, the project is expected to have an after-tax terminal value of $377,000.  The cost of capital for this project is 6.82 percent.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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  1. What is the net present value of the flier project, which is a 3-year project where Dispersion would spread fliers all over Fairfax?  The project would involve an initial investment in equipment of $570,000 today.  To finance the project, Dispersion would borrow $570,000.  The firm would receive $570,000 from the bank today and would pay the bank $640,000 in 3 years (consisting of an interest payment of $70,000 and a principal payment of $570,000).  Cash flows from capital spending would be $0 in year 1, $0 in year 2, and $184,000 in year 3.  Operating cash flows are expected to be $215,000 in year 1, -$60,000 in year 2, and ­$321,000 in year 3.  The cash flow effects from the change in net working capital are expected to be ‑$40,000 at time 0; $30,000 in year 1; -$10,000 in year 2, and $20,000 in year 3.  The tax rate is 15 percent.  The cost of capital is 5.08 percent and the interest rate on the loan would be 3.94 percent.

 

2. What is the NPV of the mall project?  The project would require an initial investment in equipment of $600,000 and would last for either 3 years or 4 years (the date when the project ends will not be known until it happens and that will be when the equipment stops working in either 3 years from today or 4 years from today).  The first annual operating cash flow of $238,000 is expected in 1 year, and annual operating cash flows of $238,000 per year are expected each year until the project ends in either 3 years or 4 years.  In 1 year, the project is expected to have an after-tax terminal value of $377,000.  The cost of capital for this project is 6.82 percent.

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