Winett Corporation is considering an investment in special-purpose equipment to enable the company to obtain a four-yearmunicipal contract. The equipment costs $291,000 and would have no salvage value when the contract expires at the end of fouryears. Estimated annual operating results of the project are as follows.Revenue from contract salesExpenses other than depreciationDepreciation (straight-line basis)Increase in net income from contract work$211,00072,750All revenue and all expenses other than depreciation will be received or paid in cash in the same period as recognized foraccounting purposes. Compute the following for Winett's proposal to undertake this contract.a. Payback periodb. Return on average investmentc. Net present value$308,000283,750$ 24,250a. Payback period.b. Return on average investment. (Round your percentage answer to 1 decimal place (i.e., 0.123 to be entered as 12.3).)c. Net present value of the proposal to undertake contract work, discounted at an annual rate of 5 percent. (Refer to the annuitytable in Exhibit 26-4.) (Round your "PV factors" to 3 decimal places.)years%

Capital budgeting is a process of evaluating potential investment projects by using different…

Answered: Winett Corporation is considering an…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 2P

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Postman Company is considering two independent projects. One project involves a new product line, and the other involves the acquisition of forklifts for the Materials Handling Department. The projected annual operating revenues and expenses are as follows: Required: Compute the after-tax cash flows of each project. The tax rate is 40 percent and includes federal and state assessments.
The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $320,000. Of this amount, $260,000 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. The contract will require an additional investment of $59,000 in working capital at the beginning of the first year and, of this amount, $39,000 will be returned to the Spartan Technology Company after six years. The investment will produce $91,000 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.) Net present value b. Should…
Garcia Co. can invest in one of two alternative projects. Project Y requires a $360,000 initial investment for new machinery with a four-year life and no salvage value. Project Z requires a $360,000 initial investment for new machinery with a three-year life and no salvage value. The two projects yield the following annual results. Cash flows occur evenly within each year. Annual Amounts Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Machinery Selling, general, and administrative expenses Income Project Y $400,000 190,000 90,000 50,000 $70,000 Project Z $500,000 200,000 120,000 50,000 $130,000 Required 1. Compute each project's annual net cash flows. 2. Compute each project's payback period. If the company bases investment decisions solely on payback period, which project will it choose? Page 987 3. Compute each project's accounting rate of return. If the company bases investment decisions solely on accounting rate of return, which…
The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $320,000. Of this amount, $260,000 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. The contract will require an additional investment of $59,000 in working capital at the beginning of the first year and, of this amount, $39,000 will be returned to the Spartan Technology Company after six years. The investment will produce $91,000 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.) X Answer is complete but…
Golden Flights, Inc. is considering buying some specialized machinery which would enable the company to obtain a six-year government contract for the design and engineering of a futuristic plane. The machinery costs $900,000 and must be destroyed for security reasons at the end of the six-year contract period. The estimated annual operating results of the project are as follows: Revenues from sales under the contract = $850,000Expenses (including annual depreciation of $150,000) = $650,000 All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. Compute the net present value of the investment in this machinery, discounted at an annual rate of 12%.
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. 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. Payback period. Return on average investment. Net present value of the proposal to undertake contract work, discounted at an annual rate of 10 percent.
Project Y requires a $345,000 investment for new machinery with a six-year life and no salvage value. The project yields the following annual results. Cash flows occur evenly within each year. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project Y $ 355,000 Annual Amounts Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Machinery Selling, general, and administrative expenses 159,040 57,500 25,000 $ 113,460 Income Required: 1. Compute Project Y's annual net cash flows. Annual amounts Income Cash Flow Sales of new product 355,000 Expenses Materials, labor, and overhead (except depreciation) 159,040 Depreciation-Machinery 57,500 Selling, general, and administrative expenses 25,000 Income $ 113,460 Net cash flow 2$ %24
Company Q is considering a project which needs an equipment. The cost of the equipment is $350,000. This equipment will be depreciated for five years on a straight-line basis to zero-salvage value. The market value of the equipment at the end of the fifth year is $25,000. Initial investment in working capital is $22,000. Annual sales and operating costs (excluding depreciation) from this project are $175,000 and 93,000 respectively. Company pays tax at 40%. The annual operating cash flow from this project is: a. $75,200 b. $64,000 c. $62,000 d. $77,200
Awal Co. has a proposed project that will generate sales of 1419units annually at a selling price of $23 each. The fixed costs are $13060 and the variable costs per unit are $4.40. The project requires $29269 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 9-year life of the project. The salvage value of the fixed assets is $8,100 and the tax rate is 33 percent. What is the operating cash flow
A project has an initial cost of $34276 and a three-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,700, $2,000, and $2377 a year for the next three years, respectively. What is the average accounting return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
GIVEN: Project C requires $800,000 net initial investment for new machinery with a 8-year life and a Salvage Value of $40,000. The company uses straight-line depreciation. Project C is expected to yield an annual Net Income of $65,000 per year. What is the Payback Period using the above information? A) 5 years B) 6 years C) 7 years D) 8 years E) None of the above
Helicopter Gear is planning to expand its product line, which requires investment of $549,500 in special-purpose machinery. The machinery has a useful life of seven years and no salvage value. The estimated annual results of offering the new products are as follows: Revenue $ 524,500 Expenses (including straight-line depreciation) (498,800) Increase in net income $ 25,700 All revenue from the new products and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. The payback period for this proposed investment is:

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