Question: A firm wishes to bid on a contract that is expected to yield the following after tax net cash flows at the end of each year:
Year 1: $5,000
Year 2: $8,000
Year 3: $9,000
Year 4: $8,000
Year 5: $8,000
Year 6: $5,000
Year 7: $3,000
Year 8: $-1,500
To secure the contract, the firm must spend 30,000 dollars to retool its plant. This retooling will have no salvage value at the end of the eight years. Comparable investment alternatives are available to the firm that earns 12 percent compounded annually. The depreciation tax advantage from the retooling is reflected in the net cash flows in the table.