The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The...
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The Spartan Technology Company has a proposed contract with theDigital Systems Company of Michigan. The initial investment in landand equipment will be $225,000. Of this amount, $180,000 is subjectto five-year MACRS depreciation. The balance is in nondepreciableproperty. The contract covers six years; at the end of six years,the nondepreciable assets will be sold for $45,000. The depreciatedassets will have zero resale value. Use Table 12-12. Use Appendix Bfor an approximate answer but calculate your final answer using theformula and financial calculator methods. The contract will requirean additional investment of $51,000 in working capital at thebeginning of the first year and, of this amount, $31,000 will bereturned to the Spartan Technology Company after six years. Theinvestment will produce $70,000 in income before depreciation andtaxes for each of the six years. The corporation is in a 25 percenttax bracket and has a 8 percent cost of capital.
a. Calculate the net present value. (Do not round intermediatecalculations and round your answer to 2 decimal places.)
The Spartan Technology Company has a proposed contract with theDigital Systems Company of Michigan. The initial investment in landand equipment will be $225,000. Of this amount, $180,000 is subjectto five-year MACRS depreciation. The balance is in nondepreciableproperty. The contract covers six years; at the end of six years,the nondepreciable assets will be sold for $45,000. The depreciatedassets will have zero resale value. Use Table 12-12. Use Appendix Bfor an approximate answer but calculate your final answer using theformula and financial calculator methods. The contract will requirean additional investment of $51,000 in working capital at thebeginning of the first year and, of this amount, $31,000 will bereturned to the Spartan Technology Company after six years. Theinvestment will produce $70,000 in income before depreciation andtaxes for each of the six years. The corporation is in a 25 percenttax bracket and has a 8 percent cost of capital.
a. Calculate the net present value. (Do not round intermediatecalculations and round your answer to 2 decimal places.)
Answer & Explanation Solved by verified expert
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | |
| Income before depreciation and taxes | $ 70,000.00 | $ 70,000.00 | $ 70,000.00 | $ 70,000.00 | $ 70,000.00 | $ 70,000.00 | |
| Depreciation on $180000 | $ 36,000.00 | $ 57,600.00 | $ 34,560.00 | $ 20,736.00 | $ 20,736.00 | $ 10,368.00 | |
| NOI | $ 34,000.00 | $ 12,400.00 | $ 35,440.00 | $ 49,264.00 | $ 49,264.00 | $ 59,632.00 | |
| Tax at 25% | $ 8,500.00 | $ 3,100.00 | $ 8,860.00 | $ 12,316.00 | $ 12,316.00 | $ 14,908.00 | |
| NOPAT | $ 25,500.00 | $ 9,300.00 | $ 26,580.00 | $ 36,948.00 | $ 36,948.00 | $ 44,724.00 | |
| Add: Depreciation | $ 36,000.00 | $ 57,600.00 | $ 34,560.00 | $ 20,736.00 | $ 20,736.00 | $ 10,368.00 | |
| OCF | $ 61,500.00 | $ 66,900.00 | $ 61,140.00 | $ 57,684.00 | $ 57,684.00 | $ 55,092.00 | |
| Capital expenditure | $ 2,25,000.00 | ||||||
| Sale of non depreciatble assets | $ -45,000.00 | ||||||
| Change in NWC | $ 51,000.00 | $ -31,000.00 | |||||
| FCF | $ -2,76,000.00 | $ 61,500.00 | $ 66,900.00 | $ 61,140.00 | $ 57,684.00 | $ 57,684.00 | $ 1,31,092.00 |
| PVIF at 8% | 1 | 0.92593 | 0.85734 | 0.79383 | 0.73503 | 0.68058 | 0.63017 |
| PV at 15% | $ -2,76,000.00 | $ 56,944.44 | $ 57,355.97 | $ 48,534.90 | $ 42,399.46 | $ 39,258.76 | $ 82,610.20 |
| NPV | $ 51,103.73 |
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The Spartan Technology Company has a proposed contract with theDigital Systems Company of Michigan. The initial investment in landand equipment will be $225,000. Of this amount, $180,000 is subjectto five-year MACRS depreciation. The balance is in nondepreciableproperty. The contract covers six years; at the end of six years,the nondepreciable assets will be sold for $45,000. The depreciatedassets will have zero resale value. Use Table 12-12. Use Appendix Bfor an approximate answer but calculate your final answer using theformula and financial calculator methods. The contract will requirean additional investment of $51,000 in working capital at thebeginning of the first year and, of this amount, $31,000 will bereturned to the Spartan Technology Company after six years. Theinvestment will produce $70,000 in income before depreciation andtaxes for each of the six years. The corporation is in a 25 percenttax bracket and has a 8 percent cost of capital.a. Calculate the net present value. (Do not round intermediatecalculations and round your answer to 2 decimal places.)
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