Question
Blue Eagle Consulting is evaluating a 1-year project that would involve an initial investment in equipment of 28,400 dollars and an expected cash flow of
Blue Eagle Consulting is evaluating a 1-year project that would involve an initial investment in equipment of 28,400 dollars and an expected cash flow of 32,300 dollars in 1 year. The project has a cost of capital of 12.18 percent and an internal rate of return of 13.73 percent. If Blue Eagle Consulting were to use 28,400 dollars in cash from its bank account to purchase the equipment, the net present value of the project would be 393 dollars. However, Blue Eagle Consulting has no cash in its bank account, so using money from its account is not possible. Therefore, the firm would need to borrow money to raise the 28,400 dollars. If Blue Eagle Consulting were to borrow money to raise the 28,400 dollars, the interest rate on the loan would be 8.95 percent. Blue Eagle Consulting would receive 28,400 dollars from the bank at the start of the project and would pay 30,942 dollars to the bank in 1 year. What is the NPV of the project if Blue Eagle Consulting borrows 28,400 to pay for the project?
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