Question

Violet Sky Recycling is evaluating the ice cream parlor project, a 2-year project that would involve buying equipment for 128,000 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 15,000 dollars in year 2. Relevant annual revenues are expected to be 128,000 dollars in year 1 and 128,000 dollars in year 2. Relevant expected annual variable costs from the project are expected to be 11,000 dollars in year 1 and 11,000 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, Violet Sky Recycling signed a deal with Orange Valley Consulting to develop an advertising campaign. The terms of the deal require Violet Sky Recycling to pay Orange Valley Consulting either 75,000 dollars in 2 years from today if the ice cream parlor project is pursued or 56,000 dollars in 2 years from today if the ice cream parlor project is not pursued. The tax rate is 10 percent and the cost of capital for the ice cream parlor project is 5.16 percent. What is the net present value of the ice cream parlor project?

Answer 1