SAP Inc.received a $1 million grant under its Small Business Innovation program.SAP invested the grant money and developed a system to remove metal contaminants from storm water in shipyards.The firm estimates that each shipyard spends $500,000 a year on storm water clean-up efforts.If SAP is able to sign up and retain four shipyards from the first year onwards,what is the present value (PV)of the project (net of investment)if the cost of capital for SAP is 18% per year? Assume a cost of operations and other costs for SAP equal 50% of revenue.

Question

Quizplus · Accepted Answer

The revenue from each shipyard is $500,000, so for four shipyards, it's $2 million per year. With costs at 50% of revenue, the net cash flow is $1 million per year. The present value of a perpetuity is calculated as cash flow divided by the cost of capital: $1 million / 0.18 = $5.56 million. Subtracting the initial $1 million investment gives a net present value of $4.56 million.

SAP IncReceived a $1 Million Grant Under Its Small Business Innovation