A security firm is offered $80,000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8.5%. Should the firm take the contract?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount the future cash flows at the given interest rate. The calculation for this scenario is:

NPV = -$74,000 + ($80,000 / (1 + 0.085)^1)
NPV = -$74,000 + $74,205.61
NPV = $205.61

Since the NPV is positive, taking the contract would be beneficial. However, since the question asks whether the firm should take the contract or not, we need to consider the opportunity cost of using the $74,000. If the firm can invest the $74,000 elsewhere and earn a higher rate of return than 8.5%, then they should not take the contract. Therefore, since the NPV is only slightly positive and we are not given information about other investment opportunities, it is safer to say that the firm should not take the contract. Thus, the best answer is C.

A Security Firm Is Offered $80,000 in One Year for Providing