Question: A firm wishes to bid on a contract that is expected to yield the following after tax net cash flow at the end of each year:
|
Year
|
Net Cash Flow
|
|
1
|
$5,000
|
|
2
|
8,000
|
|
3
|
9,000
|
|
4
|
8,000
|
|
5
|
8,000
|
|
6
|
5,000
|
|
7
|
3,000
|
|
8
|
$ -1,500
|
To secure the contract, the firm must spend 30,000 dollar 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 firms that earn 12% compounded yearly. The depreciation tax advantage from the retooling is reflected in the net cash flows in the table.
[A] Calculate the project's net present value.
[B] Should the project be adopted?
[C] Determine the meaning of the computed net present value figure?