Question

SAP Inc. received a $1 million grant under its Small Business Innovation program. SAP invested the grant money and developed a system to remove metal contaminants from storm water in shipyards. The firm estimates that each shipyard spends $500,000 a year on storm water clean-up efforts. If SAP is able to sign up and retain four shipyards from the first year onwards, what is the present value (PV) of the project (net of investment) if the cost of capital for SAP is 20% per year

Answer 1

$4,000,000

Step-by-step explanation:

The computation of the present value of the project is shown below:

Since it is given that for four shipyards and it is signed

Therefore,

Total revenue = $500,000 × 4 = $2,000,000

And we assume

Cost of operations and other costs is

= 50% of revenue

= $1,000,000

Now

Net revenue is

= $2,000,000 - $1,000,000

= $1,000,000

So, the present value of the project is

= Present Value of net revenues - Initial cost

= ($1,000,000 ÷ 0.20) - $1,000,000

= $4,000,000