Question: Green Forest Banking is evaluating a 1-year project that would involve an initial investment in equipment of 27,700 dollars and an expected cash flow of
Green Forest Banking is evaluating a 1-year project that would involve an initial investment in equipment of 27,700 dollars and an expected cash flow of 28,900 dollars in 1 year. The project has a cost of capital of 2.39 percent and an internal rate of return of 4.33 percent. If Green Forest Banking were to use 27,700 dollars in cash from its bank account to purchase the equipment, the net present value of the project would be 525 dollars. However, Green Forest 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 27,700 dollars. If Green Forest Banking were to borrow money to raise the 27,700 dollars, the interest rate on the loan would be 0.88 percent. Green Forest Banking would receive 27,700 dollars from the bank at the start of the project and would pay 27,944 dollars to the bank in 1 year. What is the NPV of the project if Green Forest Banking borrows 27,700 to pay for the project?
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