Problem:
A firm that manufactures DVD players for automakers currently have excess capacity. The firm expects that it will exhaust its excess capacity in three years. At that time it will have to invest $2 million to build new capacity. Suppose that the firm can accept additional work as a subcontractor for another company. By doing so, the firm will receive a net cash inflow of $120,000 immediately and in each of the next two years. However, the firm will have to begin expansion two years earlier than originally planned to bring new capacity on line. Assume a discount rate of 10%.
Required:
Question: What is the NPV if the firm accepts the subcontractor job?
Note: Please provide equation and explain comprehensively and give step by step solution.