Proposed contract with digital systems

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Reference no: EM132052966

The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $150,000. Of this amount, $120,000 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 $30,000. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. The contract will require an additional investment of $45,000 in working capital at the beginning of the first year and, of this amount, $25,000 will be returned to the Spartan Technology Company after six years. The investment will produce $48,000 in income before depreciation and taxes for each of the six years. The corporation is in a 35 percent tax bracket and has a 11 percent cost of capital.

a. Calculate the net present value. (Do not round intermediate calculations and round your answer to 2 decimal places.)

b. Should the investment be undertaken? No Yes

Reference no: EM132052966

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