Golden Flights, Inc., is considering buying some specialized machinery that would enable the company to obtain a six-year government contract for the design and engineering of a futuristic plane. The machinery costs $975,000 and must be destroyed for security reasons at the end of the six-year contract period. The estimated annual operating results of the project are asfollows:
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Revenue from sales under thecontract..............................
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$975,000
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Expenses other thandepreciation....................................
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$560,000
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Depreciation (straight-linebasis)....................................
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162,500
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(722,500)
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Increase in net income from governmentcontract..................................................................
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$252,500
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All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. You are to compute the following three factors for this project:
(a) Payback period: __________ years
(b) Return on average investment:
(c) Net present value of the investment in this machinery, discounted at an annual rate of 12% (an annuity table shows thatthe present value of $1 received annually for six years discountedat 12% is 4.111):