The market rate of return for investments

Watson's Bay Co. is considering a contract to manufacture didgeridoos. Producing didgeridoos will require an investment in equipment of $100,000 and operating costs of $15 per didgeridoo produced. The contract calls for the company to deliver 2,000 didgeridoos a year for each of 4 years at a price of $30 per didgeridoo. At the end of 4 years the equipment is expected to be sold for $10,000. The equipment will be depreciated as follows:

Year           Depreciation Factor

1                 0.3333

2                 0.4445

3                 0.1481

4                 0.0741

The depreciation factor is applied to the full cost of the equipment (i.e., salvage value is not considered when depreciation is determined). The tax rate is 33%, and the market rate of return for investments of this risk is 20%. Should Watson's Bay Co. take the contract to manufacture didgeridoos?

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Accounting Basics: The market rate of return for investments
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