Mojo Marine services has been offered a contract to provide highly classified se

Question

Mojo Marine services has been offered a contract to provide highly classified services to the U.S. Navy. The contract is for 8 years. The projected costs and revenues for the project are given below: Cost of new equipment $500,000 Working capital needed 100,000 Net annual Cash receipts 90,000 Equipment rebuilding cost Half way thru the contract 150,000 Salvage value of equipment In 8 years 50,000 Mojo's cost of capital is 12 percent. Complete an analysis to determine whether or not this contract should be accepted by utilizing the present value of cash inflows and outflows. Should the contract be accepted? Explain, Show all your calculations in good form.

Explanation / Answer

Since the NPV is negative contract should not be accepted.

Notes:

1. Cash Outflow at Year 1 = 500000 + 100000 = -$600000

2. Cash Flow at Year Year 4 = 90000 - 150000 = -$60000

3. Cash Inflow at Year 8 = 90000 + 50000 = $140000

Year Cash Flows PV Factor @12% Present value 0 -600000 1 -600000 1 90000 .8929 80357.14 2 90000 .7972 71747.44 3 90000 .7118 64060.22 4 -60000 .6335 -38131.08 5 90000 .5674 51068.42 6 90000 .5066 45596.80 7 90000 .4523 40711.43 8 140000 .4039 56543.65 NPV -228045.98

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