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 $370,000. Of this amount, $250,000 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 $120,000. 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 $58,000 in working capital at the beginning of the first year and, of this amount, $38,000 will be returned to the Spartan Technology Company after six years.

The investment will produce $90,000 in income before depreciation and taxes for each of the six years. The corporation is in a 30 percent tax bracket and has a 5 percent cost of capital.

a. Calculate the net present value.(Do not round intermediate calculations and round your answer to 2 decimal places.)

Answer 1

С199 Vf-250000*0.2 Net Deprecia Operating Net working Deprecia tion PVIF@5 | EBIT | Tax@ 30% | income | tion | cash flows | capital | Investment | Cash flow Present value 197 Year EBDT 198 199 1 $ 90,000 $50,000 40,000 12,000 28,000 50,000 78,000 2002 S 90,000 $80 201 3$ 90,000 $48,000 42,00012,600 29,400 48,000 77,400 202 4$ 90,000 $28,800 61,20018,360 42,840 28,800 71,640 203 5$ 90,000 $28,800 61,20018,360 42,840 28,800 71,640 204 6 90,000 $14,400 75,60022,680 52,920 14,400 67,320$ 38,000 120,000 $ 225,320 0.746 205 370,000) S (428,000)1.000 0.952 $87,000 0.907 0.864 0.823 0.784 $428,000.00 $74,285.71 $78,911.56 $66,861.03 $58,938.41 $56,131.81 $168,137.25 0 58,000 $ 78,000 000 10,0003,000 7,000 80,00087,000 $77,400 $71,640 $71,640 Net present value$75,265.78 206