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 $176,000 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 | $ | 309,000 | ||||
Expenses other than depreciation | $ | 221,000 | ||||
Depreciation (straight-line basis) | 44,000 | 265,000 | ||||
Increase in net income from contract work | $ | 44,000 | ||||
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: |
b. Compute the return on average investment for Bowman's proposal to undertake the contract work: (Round your percentage answer to 1 decimal place,(i.e., 0.123 to be entered as 12.3.))
c. Compute the net present value of the proposal to undertake contract work, discounted at an annual rate of 6 percent. (Refer to annuity table in Exhibit 26-4.)
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