Reference no: EM133088385
Question - Net Present Value Analysis - Champion Company is considering a contract that would require an expansion of its food processing capabilities. The contract covers five years. To provide the required products, Champion would have to purchase additional equipment for $104,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $48,000. For tax purposes, the equipment will be depreciated as follows:
Year 1 $13,000
Year 2 26,000
Year 3 26,000
Year 4 26,000
Year 5 13,000
Although salvage value is ignored in the tax depreciation calculations, Champion estimates the equipment will be sold for $13,000 after five years.
Assuming a 35% income tax rate and a 10% hurdle rate, compute the net present value of this contract proposal. Using net present value analysis, should Champion accept the contract?
Should Champion accept the contract?
-Champion should accept the contract because there is a negative net present value.
-Champion should not accept the contract because there is a positive net present value.
-Champion should accept the contract because there is a positive net present value.
-Champion should not accept the contract because there is a negative net present value.
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