A firm wishes to bid on a contract that is expected to yield the following after-tax net cash flows at the end of the year.
YEARNET CASH FLOW
15,000
28,000
39,000
48,000
58,000
65,000
73,000
8 -1,500
To secure the contract, the firm must spend $30,000 to retool its plant. This retooling will have no salvage value at the end of the 8 years. Comparable investment alternatives are available to the firm that earns 12 percent compounded annually. The depreciation tax benefit from the retooling is reflected in the cash flows in the table.
A. Compute the projectÂ's net present value.
B. Should the project be abandoned?
C. What is the meaning of the computed net present value figure?