Question

Your factory has been offered a contract to produce a part for a new printer. The contract would last for three​ years, and your cash flows from the contract would be $4.78

million per year. Your upfront setup costs to be ready to produce the part would be $ 7.92

million. Your discount rate for this contract is 8.1 %

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.)

What should you​ do? ​(Select the best choice​ below.)

A.The NPV rule says that you should accept the contract because the

NPV less than 0NPV<0.

B.The NPV rule says that you should not accept the contract because the

NPV less than 0NPV<0.

C.The NPV rule says that you should accept the contract because the

NPV greater than 0NPV>0.

D.The NPV rule says that you should not accept the contract because the

NPV greater than 0NPV>0.

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

If you take the​ contract, the value added to the firm will be

​$ (MILLION)

Answer 1

1. Option c is correct option C.The NPV rule says that you should accept the contract because the

NPV greater than 0NPV>0.

2. NPV of Contract =PV of Cash Flows -Initial /investment =4.78*((1-(1+8.1%)^-3)/8.1%)-7.92 =4.38
The value added to firm =4.38