Problem:
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 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 to retool its plant. This retooling will have no salvage value at the end of the 8 years. Comparable investment alternatives are available to the firm that earn 12 percent compounded annually. The depreciation tax benefit from the retooling is reflected in the net cash flows in the tables.
a. Compute the project's net present value.
b. Should the project be adopted
c. What is the meaning of the computed net present value figure?