GH Company has been offered a seven-year contract to supply a part for the government....
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Accounting
GH Company has been offered a seven-year contract to supply a part for the government. After careful study, the company has estimated the following data relating to the contract:
Cost of Equipment Needed$300,000
Working Capital Needed50,000
Annual Cash Receipts from the Delivery of Parts100,000
Annual Cash Operating Costs30,000
Salvage Value of Equipment at Termination of the Contract5,000
It is not expected that the contract would be extended beyond the initial contract period. The company's discount rate is 10%. (Ignore income taxes in this problem.)
Required:
1) Use the net present value method to determine if the contract should be accepted.
Round all computations to the nearest dollar.
2) Use the payback method to determine if the contract should be accepted. Assume GH Company requires a four-year payback period.
3)Calculate the Accrual Accounting Rate of Return.
4) Given your calculations, should GH Company accept the contract?
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