SAP Inc.received a $2 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 $600,000 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 15% per year? Assume a cost of operations and other costs for SAP equal 40% of revenue.
A)$6.3 million
B)$6.7 million
C)$7.6 million
D)$7.9 million
E)$8.3 million

Question

Quizplus · Accepted Answer

The annual revenue from four shipyards is $2.4 million ($600,000 x 4). After accounting for 40% costs, the net revenue is $1.44 million per year. Using a 15% discount rate, the present value of this perpetuity is $1.44 million / 0.15 = $9.6 million. Subtracting the $2 million investment gives a net present value of $7.6 million.

SAP IncReceived a $2 Million Grant Under Its Small Business Innovation