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Hello Mr Moffat !
Mchine set up cost payable immediately of 125000. Working cap of 4000 required at tge beginning. Will be release at the end. Cost of cap 10 %. Calculate minimum contract price at the end of the contract. I can get the npv easily. However, i dont understand the logic behind the calculation of min. contract price.The question as you have typed it out makes no sense at all!
I don’t know where you found it, but there must be more in the question otherwise it is nonsense.
Its an mcq in kaplan revision kit. Ill type it as it is in the book.
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 if the contract ?First you calculate the present value of the cash flows.
The minimum acceptable is the amount that would make the NPV of the contract equal to zero. So the present value of the price has to be equal to the present value of the cash flows as calculated.
Since the price is to be received at the end of the contract, then if the price is P, then
P must be the present value divided by the 2 year discount factor at 10%.
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