Financial investment

Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years, and your cash flows from the contract would be $5 million per year. Your upfront setup costs to be ready to produce the part would be $8 million. Your discount rate for this contact is 8%.

a. What does the NPV rule say you should do?

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b. If you take the contract, what will be the change in the value of your firm?

Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $4000 at the end of each of the next three years. The opportunity requires an initial investment of $1000 plus an additional investment at the end of the second year of $5000.

What is the NPV of this opportunity if the cost of capital is 2% per year? Should Marian take it?

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