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A firm wishes to bid on a contract that is expected to yield the following after tax net cash flows at the end of each year:

Year Net Cash Flows
1 $5,000
2 8,000
3 9,000
4 8,000
5 8,000
6 5,000
7 3,000
8 ($-1,500)

To secure the contract, the firm must spend $30,000 to retool it's plant. This retooling will have no salvage value at the end of 8 years. Comparable investment alternatives are available to the firm that earn 12 percent compounded annually. The depreciation tax benefit from the retooling is reflected in the net cash flows in the table.

A. Computing the projects net present value.

B. Should the project be adopted?

C. What is the meaning of the computed net present value figure?

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Solution Summary

The expert computes the projects net present value for adopted projects.

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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