Disco Corporation has been offered a 6-year contract to supply computing services for a bank. Disco has developed the following estimated data for the contract: Cost of special computer needed $200,000 Working capital needed 10,000 Annual cash inflows (revenues) for 6 years 300,000 Annual cash outflows (expenses) for 6 years 265,000 Servicing of computer at the end of year 4 30,000 Salvage value of the computer at the end of 6 years 15,000 The company's required rate of return is 8%. The working capital will be released at the end of the 6-year contract term. Based on a net present value analysis, should they accept the contract? Ignore the impact of income taxes.
Disco Corporation has been offered a 6-year contract to supply computing services for a bank. Disco has developed the following estimated data for the contract: Cost of special computer needed $200,000 Working capital needed 10,000 Annual cash inflows (revenues) for 6 years 300,000 Annual cash outflows (expenses) for 6 years 265,000 Servicing of computer at the end of year 4 30,000 Salvage value of the computer at the end of 6 years 15,000 The company's required rate of return is 8%. The working capital will be released at the end of the 6-year contract term. Based on a net present value analysis, should they accept the contract? Ignore the impact of income taxes.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Disco Corporation has been offered a 6-year contract to supply computing services for a bank.
Disco has developed the following estimated data for the contract:
Cost of special computer needed $200,000
Working capital needed 10,000
Annual cash inflows (revenues) for 6 years 300,000
Annual cash outflows (expenses) for 6 years 265,000
Servicing of computer at the end of year 4 30,000
Salvage value of the computer at the end of 6 years 15,000
The company's required rate of return is 8%. The working capital will be released at the end of the
6-year contract term. Based on a net present value analysis, should they accept the contract?
Ignore the impact of income taxes.
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