Question
Red Royal Aviation is evaluating the trampoline park project, a 2-year project that would involve buying equipment for 50,000 dollars that would be depreciated to
Red Royal Aviation is evaluating the trampoline park project, a 2-year project that would involve buying equipment for 50,000 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 5,000 dollars in year 2. Relevant annual revenues are expected to be 82,000 dollars in year 1 and 82,000 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, Red Royal Aviation signed a deal with Green Forest Consulting to develop an advertising campaign. The terms of the deal require Red Royal Aviation to pay Green Forest Consulting either 70,000 dollars in 2 years from today if the trampoline park project is pursued or 39,000 dollars in 2 years from today if the trampoline park project is not pursued. The tax rate is 30 percent and the cost of capital for the trampoline park project is 14.93 percent. What is the net present value of the trampoline park project?
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