Norris Property Management has been offered a six-year contract to provide grounds maintenance for various condominium corporations.

Question:

Norris Property Management has been offered a six-year contract to provide grounds maintenance for various condominium corporations. To accept the contract, the company would have to purchase several pieces of equipment for both summer and winter grounds maintenance at a total cost of $280,000. Other data relating to the contract follow: Net annual cash receipts (before taxes)

From the contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $81,000

Cost of overhauling and rebuilding the

Mechanical equipment in four years. . . . . . . . . . . . . . . . . . . . . . . . . . . .$33,000

Salvage value of the equipment at

Termination of the contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$15,000

If the contract is accepted, several old, fully depreciated pieces of equipment will be sold at a total price of $22,500. These funds will be used to help purchase the new equipment. For tax purposes, the company computes CCA deductions using the maximum rate of 20%. The company requires an 11% after-tax return on all equipment purchases. The tax rate is 30%.

Required:

Compute the net present value of this investment opportunity. Round all dollar amounts to the nearest whole dollar. Would you recommend that the contract be accepted?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...