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 $321,000 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.
All revenue and all expenses other than depreciation will be received or paid in cash in the same period as recognized for accounting purposes
Homework Answers
Answer:
Working:
Answer (a):
Annual cash flows = Net Income + Depreciation = 26750 + 80250 = $107,000
As annual cash flows are uniform:
Payback period = Investment / Annual cash flow = 321000 / 107000 = 3.00 Years
Answer (b):
Return on average investment = Net Income / Average Investment = 26750 / ((321000 + 0) / 2) = 16.7%
Answer (c)
NPV = Annual cash flows * PV of $1 annuity for 4 year at 12% rate - Initial investment
= 107000 * 3.037 - 321000
= $3.959
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