Question

SAP Inc. received a $1 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 $750,000 a year on storm water clean-up efforts. If SAP is able to sign up and retain four shipyards from the first year onwards, what is the present value (PV) of the project (net of investment) if the cost of capital for SAP is 20% per year? Assume a cost of operations and other costs for SAP equal 50% of revenue. O A. $7.8 million OB. $8.45 million O c. $7.15 million OD. $6.50 million

Answer 1

Net present value = - Investment +((Revenues*(1-proportion of costs))/Cost of capital

= -1+ ((0.75*4)*(1-0.50)/0.20) = $6.5 million (Option D)