Bowman Corporation is considering an investment in special-purpose equipment to enable the company to obtain a four-year government contract for the manufacture of a special item. The equipment costs $300,000 and would have no salvage value when the contract expires at the end of the four years. Estimated annual operating results of the project are as follows:
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| Revenue from contract sales |
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$ |
325,000 |
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| Expenses other than depreciation |
$ |
225,000 |
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| Depreciation |
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75,000 |
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(300,000 |
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| Increase in net income from contract work |
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$ |
25,000 |
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All revenue and all expenses other than depreciation will be received or paid in cash in the same period as recognized for accounting purposes.
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| a. |
Compute the payback period for Bowman's proposal to undertake the contract work:
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| b. |
Compute the return on average investment for Bowman's proposal to undertake the contract work.
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| c. |
Compute the net present value of the proposal to undertake contract work, discounted at an annual rate of 12 percent. (Refer to annuity table in
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