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A company is considering investing in a 2 year project machine set up costs will be $125000 payable immediately working capital of $4000 is required at the beginning of the contract and will be released at the end
given a cost of capital of 10% what is the minimum acceptable contract price to be received at the end of the contract?
Please help with this question. Thank you.
Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers and workings 🙂
You need to work out the present value of the set-up costs and the two working capital flows, discounting in the normal way (and the PV will be negative).
The minimum contract price will be whatever price makes the net present value equal to zero.
So if ‘x’ is the minimum contract price, the ‘x’ multiplied by the 2 years discount factor must be equal to the present value you will have calculated above.
So then you can calculate ‘x’ 🙂 🙂
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