You have just been offered a contract worth $ 1.22 million per year for 55 years....
You have just been offered a contract worth
$ 1.22 million per year for 55 years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 12.2 %
You are still negotiating the purchase price of the equipment. What is the most you can pay for the equipment and still have a positive
NPV? The most you can pay for the equipment and achieve the 12.2% annual return is $ million. (Round to two decimal places.)
Homework Answers
NPV = PV of Cash Inflows - PV of Cash Outflows
PV of Cash Inflows = Annuity x [{1 - (1 + r)-n} r]
= $1.22 million x [{1 - 1.122-55} / 0.122]
= $1.22 million x [0.9982 / 0.122] = $1.22 million x 8.1821 = $9.98 million
So,
0 = $9.98 million - C0
C0 = $9.98 million
The most the firm can pay for the equipment is $9.98 million.
If they pay any more than $9.98 million the contract would be negative-NPV.
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