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? The project would involve an initial investment in equipment of 120,000 dollars today. To finance the project, Fairfax Pizza would borrow 120,000 dollars. The firm would receive 120,000 dollars from the bank today and would pay the bank 147,600 dollars in 3 years (consisting of an interest payment of 27,600 dollars and a principal payment of 120,000 dollars). Cash flows from capital spending would be 0 dollars in year 1, 0 dollars in year 2, and 10,000 dollars in year 3. Operating cash flows are expected to be 60,000 dollars in year 1, 67,200 dollars in year 2, and -46,800 dollars in year 3. The cash flow effects from the change in net working capital are expected to be -17,000 dollars at time 0; 12,000 dollars in year 1; -4,000 dollars in year 2; and 9,000 dollars in year 3. The tax rate is 30 percent. The cost of capital is 19.16 percent and the interest rate on the loan would be 7.14 percent.

Answer 1

Calculation of Net Present Value (NPV) of the Stadium Project:

* Net Present Value = -17,000 +60,423.12 +44,509.864 -115,487.262 = $ (27,554.28)