Question

The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $300,000. Of this amount, $240,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $60,000. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

The contract will require an additional investment of $57,000 in working capital at the beginning of the first year and, of this amount, $37,000 will be returned to the Spartan Technology Company after six years.

The investment will produce $85,000 in income before depreciation and taxes for each of the six years. The corporation is in a 25 percent tax bracket and has a 8 percent cost of capital.

a. Calculate the net present value. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Answer 1

NPV = present value of future cash flows - initial cash outflow(initial invest ment)

depreciaiton = 5 year MACRS depreciation

initial cash outflow would be = cost of land and equipment + initial working capital = 300,000+57000 = 357,000

MACRS depreciation rates =

year	Depreciaiton
1	240000*0.2 = 48000
2	240000*0.32 = 76800
3	240000*0.1920 = 46080
4	240000*0.1152 = 27648
5	240000*0.1152 = 27648
6	240000*0.0576 = 13824

calculation of NPV:

NPV = $47514.58