Question

Financial Management MGMT8500 Case study on NPV Weight: 5% of your final grade 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 VAN List all relevant costs. Calculate the incremental cash inflows (the revenue the project will generate) Calculate the total yearly costs. Calculate the yearly incremental cash flows. Calculate the NPV of the project. Accept or reject the project. Marks 15 Topic Relevant costs Incremental cash inflows (the revenue the project will generate) Total yearly costs Yearly incremental cash flows NPV of the project Decision SU

The answer must be provided in excel sheets

Answer 1

Answer is given below

Cost item Amount Category Changing Relevant (Variable (Y/N) Cost (Y/N) Fixed/ Opportunity) Variable N Y Fixed Fixed Opportunity Labour cost Car Rental Allocated cost Net Income Loss $25,600 $18,000 $18,000 -$2,000 Z Z Cash Inflows $100,000 3 Total yearly cost Variable Cost Fixed Cost Total cost $25,600 $18,000 $43,600 Gross Income Less: Taxes Net Income $56,400 $15,792 $40,608 Opportunity Cost Yearly Incremental Cash $2,000 $38,608 Year | Yearly Incremental cash flow PV factor Present value of cash inflows Year 1 $38,608 0.9091 $35,098 Year 2 $38,608 0.8264 $31,907 Year 3 $38,608 0.7513 $29,007 Year 4 $38,608 0.6830 $26,370 Year 5 $38,608 0.6209 $23,973 1 $146,355 6 Decision Accept