I have a question on how to answer this question. Is it possible to post the ste
ID: 2485845 • Letter: I
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I have a question on how to answer this question. Is it possible to post the step by step solution as well? As I'm trying to fully understand how to go about it. Thank you so much
Mojo Marine services has been offered a contract to provide highly classified services to the U.S. Navy. The contract is for 8 years. The projected costs and revenues for the project are given below Cost of new equipment Working capital needed Net annual Cash receipts $500,000 100,000 90,000 Equipment rebuilding cost Half way thru the contract 150,000 Salvage value of equipment In 8 years 50,000 Mojo's cost of capital is 12 percent. Complete an analysis to determine whether or not this contract should be accepted by utilizing the present value of cash inflows and outflows. Should the contract be accepted? Explain, Show all your calculations in good form.Explanation / Answer
Assuming the net working capital is returned at the end of the project. No Tax rate is given so ignoring depreciatio effects; Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Cost of new equipment (500,000) NWC (100,000) 100,000 Equipment rebuilding cost (150,000) Net Annual Cash receipt 90,000 90,000 90,000 90,000 90,000 90,000 90,000 90,000 Salvage 50,000 Net Cash flow (600,000) 90,000 90,000 90,000 (60,000) 90,000 90,000 90,000 240,000 PV factor @12% 1 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 PV of Net Cash flows (600,000) 80,357 71,747 64,060 (38,131) 51,068 45,597 40,711 96,932 NPV of Cash flows (187,658) As the net present value of Cash flows is negative, the contract should not be accepted.
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