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 $95,000 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.
Homework Answers
Solution a:
Annual cash inflows = Net income + Depreciation = $71,250 + $23,750 = $95,000
Payback Period = Initial investment / Annual cash inflows = $95,000 / $95,000 = 1 year
Solution b:
Average investment = (Cost + Residual value) / 2 = ($95,000 + 0) / 2 = $47,500
Return on average investment = net income / Average investment = $71,250 / $47,500 = 150%
Solution c:
| Computation of NPV | ||||
| Particulars | Period | Amount | PV factor at 8% | Present Value |
| Cash outflows: | ||||
| Initial investment | 0 | $95,000.00 | 1 | $95,000 |
| Present Value of Cash outflows (A) | $95,000 | |||
| Cash Inflows | ||||
| Annual cash inflows | 1-4 | $95,000.00 | 3.3120 | $314,640 |
| Present Value of Cash Inflows (B) | $314,640 | |||
| Net Present Value (NPV) (B-A) | $219,640 | |||
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