Question: White Mountain Shipping is evaluating the vending machine project, a 2-year project that would involve buying equipment for 60,000 dollars that would be depreciated to
White Mountain Shipping is evaluating the vending machine project, a 2-year project that would involve buying equipment for 60,000 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 16,000 dollars in year 2. Relevant annual revenues are expected to be 94,000 dollars in year 1 and 94,000 dollars in year 2. Relevant expected annual variable costs from the project are expected to be 14,000 dollars in year 1 and 14,000 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, White Mountain Shipping signed a deal with Blue Eagle Media to develop an advertising campaign. The terms of the deal require White Mountain Shipping to pay Blue Eagle Media either 89,000 dollars in 2 years from today if the vending machine project is pursued or 66,000 dollars in 2 years from today if the vending machine project is not pursued. The tax rate is 30 percent and the cost of capital for the vending machine project is 8.58 percent. What is the net present value of the vending machine project?
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
