Question

Bowman Corporation is considering an investment in special-purpose equipment to enable the company to obtain a five-year government contract for the manufacture of a special item. The equipment costs $500,000 and would have no salvage value when the contract expires at the end of the five years. Estimated annual operating results of the project are as follows.

Revenue from contract sales					$	700,000
Expenses other than depreciation	$	400,000
Depreciation (straight-line basis)		100,000				500,000
Increase in net income from contract work					$	200,000

All revenue and all expenses other than depreciation will be received or paid in cash in the same period as recognized for accounting purposes. Compute the following for Bowman’s proposal to undertake the contract work.

a. Payback period. (Round pay back period year to 2 decimal places.)

b. Return on average investment.

c. Net present value of the proposal to undertake contract work, discounted at an annual rate of 10 percent. (Refer to the annuity table in Exhibit 26–4.) (Round your "PV factors" to 3 decimal places.)

Answer 1

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