Problem
Mano Construction Company (MCC) has bid on a major contract to provide fire protection to an office building. The company will learn whether it has been awarded the contract one year from today. Kirk Tuscon, the manager, estimates, that there is a 70 percent probability of MCC getting the contract. In anticipation of receiving the contract, MCC must commit now to purchase the equipment necessary to perform the work. The cost of the equipment is $1,000,000, and it will be purchased in one year. If the firm is awarded the contract, it will receive $250,000 per year for ten years, with the first cash flow occurring one year after the contract is received. The risk-adjusted required rate of return on the project is 15 percent. If the contract is awarded to another company, MCC will still have to purchase the equipment in one year, but will have no use for the equipment. Calculate the NPV of the contract.