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 $160,000. Of this amount, $145,000 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 $15,000. 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 $47,000 in working capital at the beginning of the first year and, of this amount, $27,000 will be returned to the Spartan Technology Company after six years. The investment will produce $52,000 in income before depreciation and taxes for each of the six years. The corporation is in a 25 percent tax bracket and has a 8 percent cost of capital. a. Calculate the net present value. (Do not round intermediate calculations and round your answer to 2 decimal places.) Net present value

Answer 1

: + C239 A x C 3x D B Depreciati | EBIT on 237 Year EBDT 238 239 1 $ 52,000 240 2 $ 52,000 241 3 $ 52,000 242 41 $ 52,000 243 5 $ 52,000 244 6 $ 52,000 245 = 145000*0.2 E F G H I J K L Net Depreciat Operating Net working Net after-tax PVIF@ Tax@25% income ion cash flows capital Investment cash flows 8% (47,000) (160,000) $ (207,000)| 1.000 $ 5,750 17,250 29,000 46,250 $ 46,250 0.926 $ 1,400 4,200 46,400 50,600 $ 50,600 0.857 $ 6,040 18,120 27,840 45,960 $ 45,960 0.794 $ 8,824 26,472 16,704 43,176 $ 43,176 0.735 $ 8,824 | 26,472 16,704 43,176 $ 43,176 0.681 $ 10,912 32,736 8,352 41,088 $ 27,000 $ 15,000$ 83,088 0.630$ $ 29,000 | 23,000 $ 46,400 5,600 $ 27,840 24,160 $ 16,704 35,296 $ 16,704 | 35,296 $ 8,352 43,648 Present value (207,000.00) 42,824.07 43,381.34 36,484.53 31,735.65 29,384.86 52,359.53 246 Net present value $ 29,169.99

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