Winett Corporation is considering an investment in special-purpose equipment to enable the company to obtain a four-year municipal contract. The equipment costs $91,000 and would have no salvage value when the contract expires at the end of four years. Estimated annual operating results of the project are as follows.
| Revenue from contract sales | $ | 306,000 | |||||
| Expenses other than depreciation | $ | 215,000 | |||||
| Depreciation (straight-line basis) | 22,750 | 237,750 | |||||
| Increase in net income from contract work | $ | 68,250 | |||||
All revenue and all expenses other than depreciation will be received or paid in cash in the same period as recognized for accounting purposes. Compute the following for Winett’s proposal to undertake this contract.
a. Payback period.
b. Return on average investment. (Round your percentage answer to 1 decimal place (i.e., 0.123 to be entered as 12.3).)
c.Net present value of the proposal to undertake contract work, discounted at an annual rate of 6 percent. (Refer to the annuity table in Exhibit 26–4.) (Round your “PV factors” to 3 decimal places.)
