Question

X Company has an opportunity to accept a special order that will result in immediate profit of $78,000. The marketing manager believes that if X Company accepts the order, the company will lose regular customers. Specifically, she believes the effect will be lost profits of $10,000 in each of the next 4 years. Assuming a discount rate of 8%, what is the net present value of accepting the special order?

Answer 1

Year	Cash flows		Discounting Factor	Discounted cash flow
0	Immediate Profit	$   78,000.00	1	$ 78,000.00
1	Loss of profit	$ (10,000.00)	0.925926	$ (9,259.26)
2	Loss of profit	$ (10,000.00)	0.857339	$ (8,573.39)
3	Loss of profit	$ (10,000.00)	0.793832	$ (7,938.32)
4	Loss of profit	$ (10,000.00)	0.73503	$ (7,350.30)
Net present value of Accepting offer				$ 44,878.73

Answer---Net present value of Accepting offer= $44,878.73 or 44,879