Bowman Corporation is considering an investment in special-purpose equipment to

Question

Bowman Corporation is considering an investment in special-purpose equipment to enable the company to obtain a four-year government contract for the manufacture of a special item. The equipment costs $300,000 and would have no salvage value when the contract expires at the end of the four years. Estimated annual operating results of the project are as follows:

All revenue and all expenses other than depreciation will be received or paid in cash in the same period as recognized for accounting purposes.

Compute the payback period for Bowman's proposal to undertake the contract work:

                       

    

Compute the return on average investment for Bowman's proposal to undertake the contract work: (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Compute the net present value of the proposal to undertake contract work, discounted at an annual rate of 12 percent. (Refer to annuity table in Exhibit 26-4.) (Round your "PV factor" to 3 decimal places. Omit the "$" sign in your response.)

                  

Bowman Corporation is considering an investment in special-purpose equipment to enable the company to obtain a four-year government contract for the manufacture of a special item. The equipment costs $300,000 and would have no salvage value when the contract expires at the end of the four years. Estimated annual operating results of the project are as follows:

Bowman Corporation is considering an investment in special-purpose equipment to enable the company to obtain a four-year government contract for the manufacture of a special item. The equipment costs $300,000 and would have no salvage value when the contract expires at the end of the four years. Estimated annual operating results of the project are as follows:

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Payback Period = Initial Investment/Annual Cash Inflow

Annual Cash Inflow = Revenues - Expenses other than depreciation = 325000 - 225000 = 100000

Payback Period = 300000/100000 = 3 Years

Part B:

Return on Average Investment = Average Income/Average Investment = 25000/300000/2*100 = 16.7%

Part C:

NPV = - 300000 + 100000*3.037 = 3700

Thanks.

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