Case-study

1. Case-Study
Net Present Value and Other Investment Rules
Mini Case
You have set up a new firm in Copenhagen to produce mobile face recognition
technology for all new smartphones. An opportunity has arisen, which would result in a
new contract with a major mobile phone manufacturer that would massively transform
your firm’s operations. The contract would require a significant upfront investment of
€50 million and the contract would last for eight years. The year after the contract has
ended (that is, in year 9), your firm will bear all decommissioning costs, which are
expected to be €8 million. The expected cash flows each year from the contract are
shown in the table below. Davies Electronics has a 12 per cent required return on all its
technologies but can rei4nvest future cash flows only at a rate of 10 per cent.
1. Construct a spreadsheet to calculate the internal rate of return, profitability index,
and net present value of the proposed contract.
2. Based on your analysis, should the company take the contract?