Question

5. CAPITAL BUDGETING Golden Flights, Inc., is considering buying some specialized machinery that would enable the company to obtain a six-year government contract for the design and engineering of a futuristic plane. The machinery costs $975,000 and must be destroyed for security reasons at the end of the six-year contract period. The estimated annual operating results of the project are as follows: Revenue from sales under the contract. $975,000 Expenses other than depreciation.............. $560,000 Depreciation (straight-line basis).............................. 162,500 (722,500) Increase in net income from government contract......... $252,500 All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. You are to compute the following three factors for this project: a. Payback period: years b. Return on average investment: c. Net present value of the investment in this machinery, discounted at an annual rate of 12% (an annuity table shows that the present value of $1 received annually for six years discounted at 12% is 4.111): $

Answer 1

5) Golden Flights nach a) payback period - Initial Investment Net Income punea Qiven, Mach many cost = $ 975,000. Net Income hom Govt = $252,000. Contract period $ = 975000 e payback 252.000 G = 387 year X Loo a pay back period - 3.87 years / Average retum on Investment Ros - Net proft /income cost of Investment ROI $ - 252,000 x100 975,000 Rol = 25.85%

c) Net present value Discounted it ☺ Britical Incestorsent – Discounted Annual factor man = present value Annuity - of cash flow no vale Annuity value @ 121. for byear = 4011). Over Sone Discouted Annual Sachs -$252,000 X 4011] dana = $1035,972 Mpy(&)= 1,035,972 ④ 975,000 Mor = 60,972 Mpy $60,972