Question 25)

Yellow Sand Shipping is evaluating the apple orchard project, a 2-year project that would involve buying equipment for 78,000 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 13,000 dollars in year 2. Relevant annual revenues are expected to be 95,000 dollars in year 1 and 95,000 dollars in year 2. Relevant expected annual variable costs from the project are expected to be 17,000 dollars in year 1 and 17,000 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, Yellow Sand Shipping signed a deal with Green Forest Marketing to develop an advertising campaign. The terms of the deal require Yellow Sand Shipping to pay Green Forest Marketing either 61,000 dollars in 2 years from today if the apple orchard project is pursued or 36,000 dollars in 2 years from today if the apple orchard project is not pursued. The tax rate is 30 percent and the cost of capital for the apple orchard project is 11.72 percent. What is the net present value of the apple orchard project?