Question

# Blue Eagle Banking is evaluating a 1-year project that would involve an initial investment in equipment...

Blue Eagle Banking is evaluating a 1-year project that would involve an initial investment in equipment of 34,900 dollars and an expected cash flow of 36,600 dollars in 1 year. The project has a cost of capital of 4.18 percent and an internal rate of return of 4.87 percent. If Blue Eagle Banking were to use 34,900 dollars in cash from its bank account to purchase the equipment, the net present value of the project would be 231 dollars. However, Blue Eagle Banking 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 34,900 dollars. If Blue Eagle Banking were to borrow money to raise the 34,900 dollars, the interest rate on the loan would be 3.04 percent. Blue Eagle Banking would receive 34,900 dollars from the bank at the start of the project and would pay 35,961 dollars to the bank in 1 year. What is the NPV of the project if Blue Eagle Banking borrows 34,900 to pay for the project?

Gomi Waste Disposal is evaluating a project that would require the purchase of a piece of equipment for 108,000 dollars today. During year 1, the project is expected to have relevant revenue of 94,000 dollars, relevant costs of 47,000 dollars, and relevant depreciation of 11,000 dollars. Gomi Waste Disposal would need to borrow 108,000 dollars today to pay for the equipment and would need to make an interest payment of 6,000 dollars to the bank in 1 year. Relevant net income for the project in year 1 is expected to be 14,738 dollars. What is the tax rate expected to be in year 1? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

1.

2. Computation of Tax rate

Net income = (Revenue - Cost - Interest - Depreciation) * (1 - Tax)

\$14738 = (94000 - 47000 - 6000 - 11000) * (1 - Tax)

\$14738 = 30000 * (1 - Tax)

1 - Tax = 0.491267

Tax = 0.5087

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