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 Winettâ€™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 26â€“4.) (Round your “PV factors” to 3 decimal places.)