Question

Question 13 of 25 1 Points A local government awards a landscaping company a contract worth $1.5 million per year for five years for maintaining public parks. The landscaping company will need to buy some new machinery (cost is $1 million) before they can take on the contract. If the cost of capital is 6%, what is the change in value of the landscaping company if it chooses to go ahead with the contract? O A. $6.5 million OB. $5.5 million C. $5.32 million D. $6.32 million Reset Selection

Answer 1

Change in value for the lanscaping company is equal to the NPV of the project,

So initial investment C0 = $-1 million

Company will receive $1.5 million for next 5 years

CF1 = $1.5 million

CF2 = $1.5 million

CF3 = $1.5 million

CF4 = $1.5 million

CF5 = $1.5 million

So, NPV of the project is PV of all cash flo discount at cost of capital of 6%

So, NPV = -1 + 1.5/1.06 + 1.5/1.06^2 + 1.5/1.06^3 + 1.5/1.06^4 + 1.5/1.06^5 = $5.32 million

So change in value of the company = $5.32 million