Question
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
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 $198,000 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: |
Revenue from contract sales | $ | 303,000 | ||||
Expenses other than depreciation | $ | 204,000 | ||||
Depreciation (straight-line basis) | 50,000 | (254,000 | ) | |||
Increase in net income from contract work | $ | 49,000 | ||||
| | | ||||
All revenue and all expenses other than depreciation will be received or paid in cash in the same period as recognized for accounting purposes. |
a. | Compute the payback period for Bowman's proposal to undertake the contract work: |
Payback period | years |
b. | Compute the return on average investment for Bowman's proposal to undertake the contract work:(Round your answer to 1 decimal place. Omit the "%" sign in your response.) |
Return on average investment | % |
c. | Compute the net present value of the proposal to undertake contract work, discounted at an annual rate of 5 percent. (Refer to annuity table in Exhibit 26-4.) (Round your "PV factor" to 3 decimal places. Omit the "$" sign in your response.) |
Net present value | $ |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started