Page Denny Associates has been offered a four-year contract to supply the comput

Question

Page Denny Associates has been offered a four-year contract to supply the computing requirements for a local bank. The working capital would be released at the end of the project. Denny's discount rate is 14%. Cash estimates for the contract are below. What is the NPV of this contract? 11-38 A. $28,230 B. $92,340 C. $132,916 D. $150,000 Cost of computer equipment Working capital required Upgrade software in 2 years Salvage value of equipment Annual net cash inflows $250,000 20,000 90,000 10,000 120,000 The Net Present Value Methood DOLL

Explanation / Answer

Year 0 Year 1 Year 2 Year 3 Year 4 Cost of computer -250000 Working capital -20000 Upgrade software -90000 Annual net cash inflows 120000 120000 120000 120000 Salvage value 10000 Working capital release 20000 Total cash flows -270000 120000 30000 120000 150000 PV factor 1 0.8772 0.7695 0.675 0.5921 Present value of cash flows -270000 105264 23085 81000 88815 Net present value 28164 Option A $28230 is correct Note: Answer is marginally different because of rounding off of PV factors

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