Question

Please quickly answer this question accurately thanks! a is 3 years, but b and c I don't know

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 $237,000 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				$	302,000
Expenses other than depreciation	$	223,000
Depreciation (straight-line basis)		59,250			282,250
Increase in net income from contract work				$	19,750

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 12 percent. (Refer to annuity table in Exhibit 26-4.) (Round your "PV factor" to 3 decimal places.)

     

Answer 1

SOLUTION

A. Pay back period = Initial investment / Annual cash inflows

= $237,000 / $79,000

= 3 years

Annual cash inflows = Net income + Depreciation

= $19,750 + $59,250 = 79,000

B. Return on Average Investment = Net Income / Average Investment

= $19,750 / 118,500

= 16.7%

Average Investment = $237,000 / 2 = 118,500

C. NPV = (Annual cash flows * Discount Factor) - Initial Investment

= (79,000 * 3.037) - $237,000

= $239,923 - $237,000

= $2,923

Discounted at an annual rate of 12% (an annuity table shows that the present value of $1 received annually for 4 years discounted at 12% is 3.037)