Big Red is also considering taking on a five-year contract with Standard Refining to distribute refined oil products such as gasoline. The cost of the trucking equipment and terminal upgrades required to service the contract are estimated to be $140 million. After careful consideration of the risks associated with the Standard contract, Big Red has made the determination that its own 13% hurdle rate is appropriate. The Standard contract's cash flows for the next five years are projected as follows: Standard Contract Cash Flows (in $ millions) are $40 in year 1, $40 in year 2, $40 in year 3, $40 in year 4, and $20 in year 5. Note that the contract ceases in year 5, so there are no additional relevant cash flows in year 6 and beyond. Also note that the year 5 cash flow incorporates costs associated with the environmental cleanup of equipment and storage facilities used to distribute the refined oil products. What is the present value of the future cash flows associated with the Standard contract?
Big Red is also considering taking on a five-year contract with Standard Refining to distribute refined oil products such as gasoline. The cost of the trucking equipment and terminal upgrades required to service the contract are estimated to be $140 million. After careful consideration of the risks associated with the Standard contract, Big Red has made the determination that its own 13% hurdle rate is appropriate. The Standard contract's cash flows for the next five years are projected as follows: Standard Contract Cash Flows (in $ millions) are $40 in year 1, $40 in year 2, $40 in year 3, $40 in year 4, and $20 in year 5. Note that the contract ceases in year 5, so there are no additional relevant cash flows in year 6 and beyond. Also note that the year 5 cash flow incorporates costs associated with the environmental cleanup of equipment and storage facilities used to distribute the refined oil products.
What is the
Net Present Value is also known as NPV. It is a capital budegting techniques which help in decision making on the basis of future cash inflow & outflow from the project. If the project provide the positive NPV than project should be accepted and vice versa.
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