Question
White Mountain Food is evaluating a 1-year project that would involve an initial investment in equipment of 26,500 dollars and an expected cash flow of
White Mountain Food is evaluating a 1-year project that would involve an initial investment in equipment of 26,500 dollars and an expected cash flow of 28,900 dollars in 1 year. The project has a cost of capital of 6.34 percent and an internal rate of return of 9.06 percent. If White Mountain Food were to use 26,500 dollars in cash from its bank account to purchase the equipment, the net present value of the project would be 676 dollars. However, White Mountain Food 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 26,500 dollars. If White Mountain Food were to borrow money to raise the 26,500 dollars, the interest rate on the loan would be 2.81 percent. White Mountain Food would receive 26,500 dollars from the bank at the start of the project and would pay 27,245 dollars to the bank in 1 year. What is the NPV of the project if White Mountain Food borrows 26,500 to pay for the project?
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