Your tactory has been offered a contract to produce a part for a new printes The
ID: 2614976 • Letter: Y
Question
Your tactory has been offered a contract to produce a part for a new printes The contract would last for 3 years and your cash flows from the contract would be $4 98 illion per year Your upfront setup costs to be ready to pro he part be$797 millon Your discount rate for this contract is 81% a. What does the NPV nule say you should do? b. If you take the contract, what will be the change in the value of your fim a. What does the NPV rule say you should do? The NPV of the project ie million (Round to two decimal places.) le answer in the answer box and then click Check Answer 2 t O Type here to search 6Explanation / Answer
(i) Initial set up cost = $7.97 Million
Annual cash inflows = $4.56 Million
Time = 3 years
Discount rate = 8.1%
PVAF(8.1%, 3 ) = 2.573
Present value of cash inflows = Annual cash inflows x PVAF(8.1% , 3 )
= 4.56 x 2.573
= $11.73 million
NPV = Present value of cash inflows - Initial investment
= 11.73 - 7.97
= $3.76 million
(ii) By accepting the contract, value of the firm will increase by $3.76 million.
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