Question

Your factory has been offered a contract to produce a part for a new printer. The contract would last for 33 years and your cash flows from the contract would be $4.99 million per year. Your upfront setup costs to be ready to produce the part would be

$7.98 million. Your discount rate for this contract is 7.8%.

a. What does the NPV rule say you should​ do?

b. If you take the​ contract, what will be the change in the value of your​ firm?

a. What does the NPV rule say you should​ do?

The NPV of the project is __ million.  ​(Round to two decimal​ places.)

Answer 1

Herein the question says the contract lasts for 33 years. I am not sure whether this is a typo. hence, providing for both the cases

Case 1: The contract would last for 33 years

1.
NPV=-Initial Investment+Cash flow/discount rate*(1-1/(1+discount rate)^t)
=-7.98+4.99/7.8%*(1-1/1.078^33)
=50.6291

Accept as NPV is positive

2.
=50.6291 million

Case 2: The contract would last for 3 years

1.
NPV=-7.98+4.99/7.8%*(1-1/1.078^3)
=4.9263

Accept as NPV is positive

2.
=4.9263 million