Question

4.3 MILLION A.

SAP Inc. received a $1.5 million grant under its Small Business Innovation program. SAP invested the grant money and developed a system to remove metal contaminants from storm water in shipyards. The firm estimates that each shipyard spends $400,000 a year on storm water clean-up efforts. If SAP is able to sign up and retain four shipyards in the first year onwards, what is the present value (PV) of the project (net of investment) if the cost of capital for SAP is 14% per year? Assume a cost of operations and other costs for SAP equal 40% of revenue.

4.6 MILLION B.

5.6 MILLION C.

5.4 MILLION D.

Answer 1

Answer :

We are given that,

Each shipyard spends $400,000 a year on storm water clean up.

SAP has signed up 4 shipyards

Therefore,

Total revenue = $400,000 * 4 = $1,600,000

Cost of operations and other costs = 40% of revenue = $640,000

Then,

Net revenue = $1,600,000 - $640,000 = $960,000

Now,

Compute the present value of the project as follows :

Present value of the project = Present value of net revenues - Initial cost

= ( $960,000 / 0.14 ) - $1,500,000

= $5,357,142.86

= $5.4 million

The answer is option (D) i.e., $5.4 million.