A firm that manufactures DVD players for automakers currently has excess capacity.The firm expects that it will exhaust its excess capacity in three years.At that time it will have to invest $2 million to build new capacity.Suppose that the firm can accept additional work as a subcontractor for another company.By doing so,the firm will receive a net cash inflow of $120,000 immediately and in each of the next two years.However,the firm will have to begin expansion two years earlier than originally planned to bring new capacity on line.Assume a discount rate of 10%.
What is the NPV if the firm accepts the subcontractor job?

Question

Quizplus · Accepted Answer

NPV = 120,000 + 120,000/1.1 + 120,000/1.1² - 2,000,000/1.1 + 2,000,000/1.1³ = 12,712

A Firm That Manufactures DVD Players for Automakers Currently Has