Question 1)

Violet Sky Food is evaluating a 1-year project that would involve an initial investment in equipment of 39,600 dollars and an expected cash flow of 42,700 dollars in 1 year. The project has a cost of capital of 6.48 percent and an internal rate of return of 7.83 percent. If Violet Sky Food were to use 39,600 dollars in cash from its bank account to purchase the equipment, the net present value of the project would be 503 dollars. However, Violet Sky Food 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 39,600 dollars. If Violet Sky Food were to borrow money to raise the 39,600 dollars, the interest rate on the loan would be 1.95 percent. Violet Sky Food would receive 39,600 dollars from the bank at the start of the project and would pay 40,372 dollars to the bank in 1 year. What is the NPV of the project if Violet Sky Food borrows 39,600 to pay for the project?