Question

Financial Management MGMT8500
Case study on NPV

Tech Help Inc. has been offered a new contract. The firm needs to determine whether the contract will be profitable. The new contract will generate 800 billing hours at $125 per year for 5 years. The variable costs, labour will be $32 an hour (including fringe benefits). The fixed costs include 3 vehicle for the employees to service customers at their locations will be $500 per month per car. Other fixed costs will remain the same for the company as a whole but will be allocated to this project at $1,500 for the receptionist and office supplies per month. The company tax rate is 28%. If Tech Help goes ahead with this project, it will lose 2,000 in net income per month. Calculate the NPV using a discount rate of 10% in the excel document titled “Case 2 - Week 12-13 Response template ”. Show the yearly incremental cash flows for this project and then calculate the NPV by discounting the net yearly cash flows. Advise your firm whether it should accept or reject this contract.

Required

1.   List all relevant costs.
2.   Calculate the incremental cash inflows (the revenue the project will generate)
3.   Calculate the total yearly costs.
4.   Calculate the yearly incremental cash flows.
5.   Calculate the NPV of the project.
6.   Accept or reject the project.

Answer 1

1.) List all Relevant Cost
	a.) Labour Cost at $ 32 an hour
	b.) 3 Vehicle at $ 500 per month per car
	c.) Loss of $ 2000 income per month it is the opportunity cost
2.)
Cash Inflows that Project will generate would be
	No. of billing hours in a Year			800
	Revenue per hour			$         125.00
	Revenue per Year			$ 100,000.00	(800*125)
	No. of Years of Contract			5
Total Inflow during the Contract Period				$ 500,000.00	ANS
3.)
Total Yearly Cost
Labour Cost			$   25,600.00	(800*32)
Vehicle Cost			$   18,000.00	(3*500*12)
Opportunity cost of Project			$   24,000.00	(2000*12)
Cost Allocation of the Company			$   18,000.00	(1500*12)
Total Yearly Cost			$   85,600.00	ANS
4.)
Cash Inflow per Year(a)			$ 100,000.00
Cash Outflow for the Project(b)			$   67,600.00	(85600-18000)
Profit before Tax((a)-(b))©			$   32,400.00
Tax @ 28% (d)			$     9,072.00
Incremental Cash Flows(e)			$   23,328.00	ANS
5.)
NPV of the Project
		Disc. Rate
Years	Cash Flow	at 10%	NPV
1	$ 23,328.00	0.9090909	$   21,207.27
2	$ 23,328.00	0.8264463	$   19,279.34
3	$ 23,328.00	0.7513148	$   17,526.67
4	$ 23,328.00	0.6830135	$   15,933.34
5	$ 23,328.00	0.6209213	$   14,484.85
	NPV for the Project		$   88,431.47
6.)
As there is Positive NPV, Tech Help Inc should accept the project.

THANK YOU
HOPING FOR A POSITIVE RESPONSE