Question

Red Royal Packaging is evaluating a 1-year project that would involve an initial investment in equipment of 37,300 dollars and an expected cash flow of 38,900 dollars in 1 year. The project has a cost of capital of 3.1 percent and an internal rate of return of 4.29 percent. If Red Royal Packaging were to use 37,300 dollars in cash from its bank account to purchase the equipment, the net present value of the project would be 431 dollars. However, Red Royal Packaging 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 37,300 dollars. If Red Royal Packaging were to borrow money to raise the 37,300 dollars, the interest rate on the loan would be 1.7 percent. Red Royal Packaging would receive 37,300 dollars from the bank at the start of the project and would pay 37,934 dollars to the bank in 1 year. What is the NPV of the project if Red Royal Packaging borrows 37,300 to pay for the project?

Answer 1

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Given: cost of capital = 3.1%. 2 Internal Rate of Return = 4. 29% -14 Red Royal Packaging were to use $37800 in cash from its bank account to purchase the equipment the NPV of the project: Prof inflows 38900X0:974 377-31 pr of outflow = 37300 X =(37300) Services 4 3) if Red Royal Packaging were to borrow $37300 to pay for the project at the rate of 1.7% interest NPV of the project: py of Inflow = 37300 x1 = 37300 pr of outflow 37934 x 0.97 = (36193) 507 Note-1: Note-2: 37300 x101:72: 37434 DF @ 3.1% for year l=0.97 - 1/1