managerial accounting help ASAP?!?! n (Appendix 13A) Vemon Company has been the
ID: 2565470 • Letter: M
Question
managerial accounting help ASAP?!?!
n (Appendix 13A) Vemon Company has been the careful study, the company has estimated the een offered a seven-year contract to supply a part for n has estimated the following data relating to the contract: mmilitary. Ater $300,000 $50,000o Cost of Equipment Needed Working Capital Needed Innual Cash Reccipts fiom the Delivery of Parts. Sahage Value of Equipment at Termination of the $70,000 $5.000 Less Cash Operating Costs Contract It is not expected that the contract would be extended beyon company's discount rate is 10%. (Ignore income taxes in the initial contract period. The e taxes in this problem.) Required Use the net present value method to determine if the contract shou computations to the nearest dollar. be accepted. Round all a ten-year life and would requir minate and theExplanation / Answer
Cost of the equipment = 300,000
Working capital needed = 50,000
Present value of cash outflows = Cost of the equipment + working capital needed = 300,000 + 50,000 = 350,000
Cash inflows = 70,000
Present value of cash inflows of 70,000 at 10% for 7 years = 4.868 * 70,000 = 340,760
Salvage value at termination of the contract = 5,000
Present value of salvage value at termination of the contarct at 10% in the year 7 = 0.513 * 5,000 = 2,565
Present value of toatl cash inflows = 340,760 + 2,565 = 343,325
NET PRESENT VALUE = Present value of cash inflows - Present value of cash out flows = 343,325 - 350,000 = 6,675
As per the Net present value method the contract should not be accepted as it results in a loss of 6,675.
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