Question

White Mountain Banking is evaluating the pet care center project, a 2-year project that would involve buying equipment for 52,000 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 23,000 dollars in year 2. Relevant annual revenues are expected to be 96,000 dollars in year 1 and 96,000 dollars in year 2. Relevant expected annual variable costs from the project are expected to be 13,000 dollars in year 1 and 13,000 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, White Mountain Banking signed a deal with Orange Valley Media to develop an advertising campaign. The terms of the deal require White Mountain Banking to pay Orange Valley Media either 52,000 dollars in 2 years from today if the pet care center project is pursued or 28,000 dollars in 2 years from today if the pet care center project is not pursued. The tax rate is 30 percent and the cost of capital for the pet care center project is 19.57 percent. What is the net present value of the pet care center project?

Answer 1