Question

1. Fairfax Pizza is evaluating a 1-year project that would involve an initial investment in equipment of 22,100 dollars and an expected cash flow of 24,800 dollars in 1 year. The project has a cost of capital of 8.95 percent and an internal rate of return of 12.22 percent. If Fairfax Pizza were to use 22,100 dollars in cash from its bank account to purchase the equipment, the net present value of the project would be 663 dollars. However, Fairfax Pizza 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 22,100 dollars. If Fairfax Pizza were to borrow money to raise the 22,100 dollars, the interest rate on the loan would be 4.78 percent. Fairfax Pizza would receive 22,100 dollars from the bank at the start of the project and would pay 23,156 dollars to the bank in 1 year. What is the NPV of the project?

2. Gomi Waste Disposal is evaluating a project that would require the purchase of a piece of equipment for 120,000 dollars today. During year 1, the project is expected to have relevant revenue of 123,000 dollars, relevant costs of 37,000 dollars, and relevant depreciation of 20,000 dollars. Gomi Waste Disposal would need to borrow 120,000 dollars today to pay for the equipment and would need to make an interest payment of 8,000 dollars to the bank in 1 year. Relevant net income for the project in year 1 is expected to be 32,215 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.

Please show your work for both of the problems

Answer 1

1.

	Y0	Y1
Cash Flow for Project	-22100	24800
Cash Flow from Bank	22100	-23156
Total Cash Flow for Farifax	0	1644
NPV	1,384.99

NOV= rate(8.95%, 0,1644) = 1384.99

2.

Given all the values:

	Y1
Revenue	123,000
Costs	37,000
Dep	20,000
Interest	8,000
PBT	58,000
Tax	25,785
PAT	32,215

PBT = revenue - Costs- Depreciation - Interest = 123,000-37,000-20,000-8,000= 58,000

PAT as given = 32,215. So tax= 58,000 - 32,215 = 25,785,

So tax Rate = Tax/PBT = 25,785 /58,000 = 44.46% = 0.4446