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 $225,000. Of this amount, $180,000 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 $45,000. 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 $51,000 in working capital at the beginning of the first year and, of this amount, $31,000 will be returned to the Spartan Technology Company after six years. The investment will produce $70,000 in income before depreciation and taxes for each of the six years. The corporation is in a 30 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

Net Present Value		=	Present value of cash inflows			-	Present value of cash outflows
		Year0	Year1	Year2	Year3	Year4	Year5	Year6
	EBDT		70,000.00	70,000.00	70,000.00	70,000.00	70,000.00	70,000.00
	less dep		36,000.00	57,600.00	34,560.00	20,736.00	20,736.00	10,368.00
	EBT		34,000.00	12,400.00	35,440.00	49,264.00	49,264.00	59,632.00
	Less tax		10,200.00	3,720.00	10,632.00	14,779.20	14,779.20	17,889.60
	EAT		23,800.00	8,680.00	24,808.00	34,484.80	34,484.80	41,742.40
	Add Depreciation		36,000.00	57,600.00	34,560.00	20,736.00	20,736.00	10,368.00
	(Since non cash Expenditure
	Total		59,800.00	66,280.00	59,368.00	55,220.80	55,220.80	52,110.40
	Cash Inflow
Particulars		Year0	Year1	Year2	Year3	Year4	Year5	Year6
Cash Inflows			59,800.00	66,280.00	59,368.00	55,220.80	55,220.80	52,110.40
Sale value								45,000.00
Working capital returned								31,000.00
		0.00	59,800.00	66,280.00	59,368.00	55,220.80	55,220.80	1,28,110.40
Cash Out flows
Equipment		2,25,000.00
Working Capital		51,000.00
		2,76,000.00	0.00	0.00	0.00	0.00	0.00	0.00
Net Cash flows		-2,76,000.00	59,800.00	66,280.00	59,368.00	55,220.80	55,220.80	1,28,110.40
Present value of net cash flows		-2,76,000.00	55,370.37	56,824.42	47,128.23	37,582.35	34,798.47	74,751.19		1.08
Hence Net present value			=	30,455.03
Since the above amount is positive accept the decision