Question

Company A has been offered a 5 years contract to supply IT services for a customer. If they finally accept to enter that project, they'll have to afford the following expenses: Cost of equipment: 300,000€; Working capital required: 30,000€; Upgrading of equipment after 3 years: 100,000€ and, at the end, the residual value of the equipment will be of 30,000€ In case they decide to enter that project, the annual cash inflow will be 150,000€. The working capital will be released at the end of the project.

Company A requires a 15% return, minimum

. Find the NPV of this project and if it makes sense for Company A to enter it.

Answer 1

year	Description	Cash Flows	CV Factor at 15%	Discounted Cash flows
0	Intial cost of Equipment	-3,30,000	1.0000	-3,30,000
1	Cash Inflow	1,50,000	0.8696	1,30,440
2	Cash Inflow	1,50,000	0.7561	1,13,415
3	Cash Inflow	1,50,000	0.6575	98,625
3	Upgradation of Equipment	-1,00,000	0.6575	-65,750
4	Cash Inflow	1,50,000	0.5718	85,770
5	Cash Inflow	1,50,000	0.4972	74,580
5	Working capital and residual value	60,000	0.4972	29,832
		NPV		1,36,912
Note: Assuming that upgrading of equipment done at start of year 4, It equals to end of year 3

Company A can accept the project as NPV is Positive.