Question
Platinum Water Recycling is evaluating the medical clinic project, a 2-year project that would involve buying equipment for 118,000 dollars that would be depreciated to
Platinum Water Recycling is evaluating the medical clinic project, a 2-year project that would involve buying equipment for 118,000 dollars that would be depreciated to zero over 2 years using straight-line depreciation. Cash flows from capital spending would be $0 in year 1 and 9,000 dollars in year 2. Relevant annual revenues are expected to be 121,000 dollars in year 1 and 121,000 dollars in year 2. Relevant expected annual variable costs from the project are expected to be 10,000 dollars in year 1 and 10,000 dollars in year 2. Finally, the firm has no fixed costs in year 1 and one fixed cost in year 2 of the project. Yesterday, Platinum Water Recycling signed a deal with Green Forest Media to develop an advertising campaign. The terms of the deal require Platinum Water Recycling to pay Green Forest Media either 57,000 dollars in 2 years from today if the medical clinic project is pursued or 36,000 dollars in 2 years from today if the medical clinic project is not pursued. The tax rate is 20 percent and the cost of capital for the medical clinic project is 14.76 percent. What is the net present value of the medical clinic project?
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