The Spartan Technology Company has a proposed contract with the Digital Systems
ID: 2742987 • Letter: T
Question
The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $320,000. Of this amount, $300,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $20,000 after taxes. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
The contract will require an additional investment of $64,000 in working capital at the beginning of the first year and, of this amount, $44,000 will be returned to the Spartan Technology Company after six years.
The investment will produce $103,000 in income before depreciation and taxes for each of the six years. The corporation is in a 30 percent tax bracket and has a 15 percent cost of capital.
Calculate the net present value. (Do not round intermediate calculations and round your answer to 2 decimal places.)
The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $320,000. Of this amount, $300,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $20,000 after taxes. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Explanation / Answer
Answer a :
Answer b : No, The investment should not be undertaken. Because Its NPV is negative.
Calculation of NPV Year Income Depreciation Income before tax Income tax @ 30% Net Income Cash Inflow PVIF @ 15% PV of Cash Flow 1 103000 60000 43000 12900 30100 90100 0.870 78387.00 2 103000 96000 7000 2100 4900 100900 0.756 76280.40 3 103000 57600 45400 13620 31780 89380 0.658 58812.04 4 103000 34500 68500 20550 47950 82450 0.572 47161.40 5 103000 34500 68500 20550 47950 82450 0.497 40977.65 6 103000 17400 85600 25680 59920 77320 0.432 33402.24 Present value of cash inflow 335020.73 PV of Sale of assets 20000 0.432 8640 PV of Working capital return 44000 0.432 19008 27648.00 Total present value of cash inflow 362668.73 Less Initial out lay Property & Equipment 320000 Investment 64000 384000.00 Net presnt Value (21,331.27) Net Present Value will be $ (21331.27). Working Calculation of Depreciation Year Asset Value Macrs Depreciation rate Depreciation 1 300000 0.200 60000 2 300000 0.320 96000 3 300000 0.192 57600 4 300000 0.115 34500 5 300000 0.115 34500 6 300000 0.058 17400 Total 300000Related Questions
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