-Your factory has been offered a contract to produce a part for a new printer. The contract would last for 3 years and your cash flows from the contract would be $4.87 million per year. Your upfront setup costs to be ready to produce the part would be $7.89 million. Your discount rate for this contract is 7.8%.
a. Draw a timeline of the contract from your perspective.
b. What’s payback period of the contract (in years)? (Round to two decimal places)
c. If payback rule is 1.5 years, are you going to accept the project?
d. What’s the NPV of the project (in millions)?
e. Based on the NPV of the project, are you going to accept the project? Why?
f. If you take the contract, what will be the change in the value (in millions) of your firm?
g. What is the IRR?
h. Based on the IRR, are you going to accept the project?