Reference no: EM132514780

Berger's Lawn Maintenance Inc. is considering accepting 20-year property maintenance contract from the City of Kingston. The contract would require Berger's to acquire new landscaping equipment, including a new trencher and excavator machine, amounting to a total purchase cost of $500,000 plus installation costs of $50,000. Other data relating to the contract are as follows: Annual incremental revenues from the contract $200,000 Annual maintenance cost for the new equipment $80,000 Additional maintenance costs at the end of year 10 $300,000 Salvage value of the equipment at termination of the contract $20,000 If the contract was accepted, several old, fully depreciated pieces of equipment would be sold at a total price of $30,000 upon signing the contract. These funds would be used to help purchase the new equipment. For tax purposes, the company computes CCA deductions using the maximum rate of 20%. The company requires an 11% after-tax return on all equipment purchases. The tax rate is 30%.

Required:

Question 1: Compute the net present value of this investment opportunity. Round all dollar amounts to the nearest whole dollar. Would you recommend that the contract be accepted?