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?
A) Yes, since net present value (NPV) is positive.
B) It does not matter whether the contract is taken or not, since NPV = 0.
C) Yes, since net present value (NPV) is negative.
D) No, since net present value (NPV) is negative.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash inflow of $80,000 at the interest rate of 8.5% and comparing it to the current cost of $74,000. The present value of $80,000 in one year is $80,000 / (1 + 0.085) = $73,722.63, which is less than $74,000, resulting in a negative NPV.

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