MetalMouth received a $1.5 million government innovation grant. MetalMouth invested the grant money and developed a system to remove metal contaminants from storm water in shipyards. The firm estimates that each shipyard spends $400,000 a year on storm water clean-up efforts. If MetalMouth is able to sign up and retain four shipyards in the first year onwards, what is the present value (PV) of the project (net of investment) if the cost of capital for MetalMouth is 16% per year? Assume a cost of operations and other costs for SAP equal 60% of revenue.

Question

Quizplus · Accepted Answer

First, we need to calculate the annual revenue generated by MetalMouth by taking the product of the number of shipyards (4) and the amount spent on storm water clean-up efforts by each shipyard ($400,000), which comes out to be $1.6 million.

Next, we need to calculate the annual operating cost of MetalMouth by taking 60% of the annual revenue, which is $960,000.

The annual cash flow generated by the project will be the difference between the annual revenue and operating cost, which is $640,000.

We can now calculate the present value of this annual cash flow over a period of 5 years (assuming a discount rate of 16% per year) using the formula for the Present Value of an Annuity:
PV = CF x [1 - (1 + r)^-n] / r 
where:
CF = Annual cash flow = $640,000
r = Discount rate = 16%
n = Number of years = 5

Plugging in the values, we get:
PV = $640,000 x [1 - (1 + 0.16)^-5] / 0.16 
PV = $2,485,361.43

Finally, we need to subtract the initial investment of $1.5 million to get the net present value (NPV) of the project:
NPV = PV - Initial investment
NPV = $2,485,361.43 - $1,500,000
NPV = $985,361.43

Therefore, the present value (PV) of the project (net of investment) is $985,361.43, which is closest to option B ($2.5 million).

MetalMouth Received a $1