Question

SAP Inc received a 51.5 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 50% of revenue. OA. 53.4 million OB. $3.6 million O C. $42 million OD. $4.4 million

Answer 1

The present value is computed as shown below:

= [ (Revenue per shipyard x 4 shipyards - cost of shipyards) ] / cost of capital - Initial cost

= [ ($ 400,000 x 4 - 50% x $ 400,000 x 4) ] / 0.14 - $ 1,500,000

= $ 4.2 million Approximately

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