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 $234,000 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 5 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 $234,000 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

Annual Cash inflows from operation = Net income before depreciation

= 62000 + 55000

= $117000

a. Payback Period

Initial Investment = $234000

Therefore, Pay back period = 2 years.

b. Average annual Investment = 234000/4 = $58500

Annual Net income = $62000

Return on average net investment = 62000/58500 * 100 = 105.98

c. NPV @ 5% = (117000*3.546) - 234000 = 180882

Year Cash flows Cumulative cash flows 1 117000 117000 2 117000 234000 3 117000 351000 4 117000 468000

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