Problem:
You have just been offered a contract worth $1million per year for 5 years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 12%. You are still negotiating the purchase price of the equipment.
A. What is the most you can pay for the equipment and not have a negative NPV?
B. What steps do you take to find this answer?
Justify your answer.