838 A 1 SECTION 6 - TWO (2) Problem questions - Total 25 marks 2 3 Question 1 - 10 marks 4 5 Q1. Infotech Corp. has been offered a ten-year contract to supply an industrial customer. After careful stody. 6 the company has estimated the following data relating to the contract: 7 8 Cost of equipment needed $425,000.00 Working capital needed S60,000.00 10 Annual cash receipts less cash operating costs $78,000.00 11 Salvage value of equipment at end of the contract $5,000.00 12 13 It is not expected that the contract would be extended beyond the initial contract period. 14 The company's discount rate is 11%. 15 16 Required: 17 18 a). Using the net present value (NPV) method, determine if the contract should be accepted. Round all 19 computations to the nearest dollar. Ignore income taxes. (8 marks) 20 Years tash Inflow/Outflo Discount Facto Present Value Items 1 -2 3 3 otad? (1 marka MOTION FORMULASHI GK HERE TO SAVE YOUR WORK 17 Working capital needed 10 Annual cash receipts lens canh operating costs 11 Salvage value of equipment at end of the contract S60,000.00 $78,000.00 $5,000.00 12 13 14 15 It is not expected that the contract would be extended beyond the initial contract period. The company's discount rate is 11% 17 Present Value 16 Required: 18 a). Using the net present value (NPV) method, determine if the contract should be accepted. Round all 19 computations to the nearest dollar. Ignore income taxes. (8 marks) 20 21 Items Years ash Inflow/Outflo Discount Factor 22 23 24 25 26 27 28 29 b) Based on NPV method, should the contract be accepted ? (1 mark) 30 th 31 C). Explain why you said yes or no in your answer in (b) above. (1 mark) 32 33 84