Question

P 8-8 (similar to) Question Help Your factory has been offered a contract to produce a part for a new printer. The contract would last for 3 years and your cash flows from the contract would be $6.01 million per year. Your upfront setup costs to be ready to produce the part would be $8.21 million. Your discount rate for this contract is 7.8% a. What does the NPV rule say you should do? b. If you take the contract, what will be the change in the value of your firm?

Answer 1

a. NPV rule states that if NPV is Positive Project should be accepted.
Number of years =3
PMT =5.01
Rate =7.5%
Initial Investment =8.21
NPV =PV of cash flows -Investment =5.01*((1-(1+7.5%)^-3)/7.5%)-8.21 =4.82
NPV is positive .Hence it should be accepted.

b. The change in value of your firm =4.82