Mahatma Consulting wants to bid on a contract that is expected to yield the following after-tax net cash flows at the end of each year:
Year 1 - $ 5000
Year 2 - $ 8000
Year 3 - $ 9000
Year 4 - $ 8000
Year 5 - $ 8000
Year 6 - $ 5000
Year 7 - $ 3000
Year 8 - $ -1500
To secure the contract Mahatma consulting must spend $ 30 000 to retool the plant, and the retooling project will have no salvage value at the end of the 8 years. Comparable investment alternatives are available to the company that earns 12% compounded annually. The depreciation tax benefit from the retooling is reflected in the net cash flows above. Please show all calculations.
- What is the project's net present value?
- Is it a good idea to adopt the project? Why or why not?