Question
What is the net present value of the stadium project, which is a 3-year project where Fairfax Pizza would sell pizza in the baseball stadium?
What is the net present value of the stadium project, which is a 3-year project where Fairfax Pizza would sell pizza in the baseball stadium? The project would involve an initial investment in equipment of 105,000 dollars today. To finance the project, Fairfax Pizza would borrow 105,000 dollars. The firm would receive 105,000 dollars from the bank today and would pay the bank 129,150 dollars in 3 years (consisting of an interest payment of 24,150 dollars and a principal payment of 105,000 dollars). Cash flows from capital spending would be 0 dollars in year 1, 0 dollars in year 2, and 12,000 dollars in year 3. Operating cash flows are expected to be 57,750 dollars in year 1, 54,600 dollars in year 2, and -24,150 dollars in year 3. The cash flow effects from the change in net working capital are expected to be -8,000 dollars at time 0; -3,000 dollars in year 1; -7,000 dollars in year 2; and 18,000 dollars in year 3. The tax rate is 20 percent. The cost of capital is 5.69 percent and the interest rate on the loan would be 7.14 percent.
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