Bowman Corporation is considering an investment in special-purpose equipment to
ID: 2497425 • Letter: B
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 $303,000 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 percentage answer to 1 decimal place,(i.e., 0.123 to be entered as 12.3.))
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.)
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 $303,000 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
= 25,250 + 75,750
= $101,000
a. Payback Period
Year
Cash flows
Cumulative cash flows
1
101000
101000
2
101000
202000
3
101000
303000
4
101000
404000
Initial Investment = $303,000
Therefore, Payback period = 3 years.
b)
Average annual Investment = 303,000/4 = $75,750
Annual Net income = $25,250
Return on average net investment = 25,250/75,750 * 100 = 0.333
c)
NPV @ 5% = (101,000*3.546) – 303,000 = $55,146.
Year
Cash flows
Cumulative cash flows
1
101000
101000
2
101000
202000
3
101000
303000
4
101000
404000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.