Explorer Computer Places inspection & PARTIAL Ss Permits &Fnal; nepect... condit

Question

Explorer Computer Places inspection & PARTIAL Ss Permits &Fnal; nepect... condition 2017 Data Int. Door Metal Roof pant201 Sheet for ...SelectionsColors Help Seve & Exi Submit 26 Homework Bowman Corporation is considering an invessment in special-purpose equipment so eneble the company bo obtain a tour-er government contract for the manufacture of a special item The equipment costs $212.000 and would have no salvage value when the contract expires at the end of the four years. Estimated annual operating resuts of the project are as follows 216,60 Depreciatlon (straight-ie basis) ncrease in net income fom centract ok All revenue and all expenses other than depreciation will be received or paid in cash in the same period as recognized for accounting a. Payback perlod Round pay back period year to 2 decimal places b. Return on average investment Round your percentage answer to 1 decimal place 0.123 to be entered as 12.3) C. Net present velue of the proposal to undertake contract work discounted at an annual rate of 6 percen Refer so the annuty table n Exhibi 26 4) (Round your "PV factors" to 3 decimal places Prey 1of 5 Next>

Explanation / Answer

Cost of equipment = $212,000

(a) Payback period = Cost of equipment/Annual cash inflow

= 212,000 - 106,000

= $106,000

(b) Average investment = 212,000 x 1/2

= $106,000

Return on average investment = Net annual income/Average investment

= 53,000/106,000

= 50%

(c) Present value of cash inflows = Annual cash inflows x PVAF(6%, 4)

= 106,000 x 3.465

= $367,290

NPV = Present value of cash inflows - Cost of equipment

= 367,290 - 212,000

= $155,290

Revenue from contract sales 322,000 Expenses other than depreciation -216,000 Depreciation -53,000 Increase in net income 53,000 Add: depreciation 53,000 Cash inflows 106,000

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