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Another company has been offered a four-year contract to supply the computing requirements for a local bank. Assume a 14% discount rate. The working capital will be released at the end of the contract. The cash flow information is as follows: Cost of computer equipment $250,000 Working capital required $20,000 Equipment upgrade in 2 years $90,000 Equipment salvage value in 4 years $10,000 Annual net cash inflow $120,000 What is the net present value of the contract with the local bank

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Zvikoid

Answer:

$28,155.81

Explanation:

Summary of Cash flows :

Year 0 = - ($250,000 + $20,000) = - $270,000

Year 1 = $120,000

Year 2 = $120,000 - $90,000 = $30,000

Year 3 = $120,000

Year 4 = $120,000 + $10,000 + $20,000 = $150,000

Using the CFj Function of a financial calculator we have :

- $270,000      CFj 0

$120,000         CFj 1

$30,000          CFj 2

$120,000         CFj 3

$150,000         CFj 4

I/yr = 14%

Thus, the net present value of the contract with the local bank is $28,155.81

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