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Red Royal Banking is evaluating the yoga studio project, a 2-year project that would involve buying...

Red Royal Banking is evaluating the yoga studio project, a 2-year project that would involve buying equipment for 76,000 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 19,000 dollars in year 2. Relevant annual revenues are expected to be 84,000 dollars in year 1 and 84,000 dollars in year 2. Relevant expected annual variable costs from the project are expected to be 16,000 dollars in year 1 and 16,000 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, Red Royal Banking signed a deal with Orange Valley Media to develop an advertising campaign. The terms of the deal require Red Royal Banking to pay Orange Valley Media either 63,000 dollars in 2 years from today if the yoga studio project is pursued or 32,000 dollars in 2 years from today if the yoga studio project is not pursued. The tax rate is 30 percent and the cost of capital for the yoga studio project is 12.47 percent. What is the net present value of the yoga studio project?

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jeff jeffy answered 1 year ago
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