Question

your factory has been offered a contract to produce a part of a new printer the contract would last for three years and the cost flow from the contract would be 5.13 million per year. You're up front setup course would be to produce the part 7.82 million. your discount rate for this contract is 8.5% a what does the npv rule say you should do and be if you take the contract what will be the change in the value of your firm

Answer 1

a )   what does the npv rule say you should do ?

NPV = cash flow / (1+r)1 + cash flow / (1+r)2 + cash flow / (1+r)n - Initial investment

=  5,130,000 / (1 + 0.085)1 +  5,130,000 / (1 + 0.085)2 +  5,130,000 / (1 + 0.085)3​​​​​​​ - 7,820,000

= ( 4,728,110.59 + 4,357,705.62 +4,016,318.54 ) - 7,820,000

= 13,102,134 - 7,820,000

  = $ 5,282,134.75

b )

Here NPV is greater than zero. so it should be accepted also it will increse the value of the firm