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Calculate the Accrual Accounting Rate of Return

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Reference no: EM132596956

Question - GH Company has been offered a seven-year contract to supply a part for the government. After careful study, the company has estimated the following data relating to the contract:

Cost of Equipment Needed $300,000

Working Capital Needed 50,000

Annual Cash Receipts from the Delivery of Parts 100,000

Annual Cash Operating Costs 30,000

Salvage Value of Equipment at Termination of the Contract 5,000

It is not expected that the contract would be extended beyond the initial contract period. The company's discount rate is 10%. (Ignore income taxes in this problem.)

Required -

1) Use the net present value method to determine if the contract should be accepted. Round all computations to the nearest dollar.

2) Use the payback method to determine if the contract should be accepted. Assume GH Company requires a four-year payback period.

3) Calculate the Accrual Accounting Rate of Return.

4) Given your calculations, should GH Company accept the contract?

Reference no: EM132596956

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