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denny associates has been offered a four year contract to supply the computing requirements for a local bank. The working capital would be released at the end of the project. Denny's discount rate is 14%. Cash estimates for the contract are below. What is the NPV of this contract? $28,230 | $92,340 | $132,916 | $150,000

Answer :

The correct answer to the given question is option 1:The NPV of the contract is $28,230

Cash flow information      ║                                       14%           ║Present V

Cost of the computer equipment = $250,000           1.000       250,000

Working capital required = $ 20,000                         1.000          20,000

Upgrading of equipment in 2 years = $ 90,000        2.914           349,680

Salvage value of equipment in 4 years = $ 10,000    0.769         69,210

Annual net cash flow = 120,000                                    0.592         5,920

Working capital released = 20,000                            0.592           11,840

NPV                                                                                                 28,230

The difference between the present value of cash inflows and outflows over time, or net present value (NPV), is what we refer to as this. The profitability of an anticipated investment or project is examined using NPV in capital budgeting and investment planning.

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