The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $260,000. Of this amount, $210,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $50,000. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. The contract will require an additional investment of $56,000 in working capital at the beginning of the first year and, of this amount, $36,000 will be returned to the Spartan Technology Company after six years. The investment will produce $81,000 in income before depreciation and taxes for each of the six years. The corporation is in a 25 percent tax bracket and has a 6 percent cost of capital. a. Calculate the net present value. Note: Do not round intermediate calculations and round your answer to 2 decimal places. Net present value b. Should the investment be undertaken?
The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $260,000. Of this amount, $210,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $50,000. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. The contract will require an additional investment of $56,000 in working capital at the beginning of the first year and, of this amount, $36,000 will be returned to the Spartan Technology Company after six years. The investment will produce $81,000 in income before depreciation and taxes for each of the six years. The corporation is in a 25 percent tax bracket and has a 6 percent cost of capital. a. Calculate the net present value. Note: Do not round intermediate calculations and round your answer to 2 decimal places. Net present value b. Should the investment be undertaken?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![Problem 12-28 (Algo) Working capital requirements in capital budgeting [LO12-4]
The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial
investment in land and equipment will be $260,000. Of this amount, $210,000 is subject to five-year MACRS depreciation.
The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets
will be sold for $50,000. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an
approximate answer but calculate your final answer using the formula and financial calculator methods.
The contract will require an additional investment of $56,000 in working capital at the beginning of the first year and, of this
amount, $36,000 will be returned to the Spartan Technology Company after six years.
The investment will produce $81,000 in income before depreciation and taxes for each of the six years. The corporation is in
a 25 percent tax bracket and has a 6 percent cost of capital.
a. Calculate the net present value.
Note: Do not round intermediate calculations and round your answer to 2 decimal places.
Net present value
b. Should the investment be undertaken?
○ Yes
O No](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F45d04f4e-9509-422c-8480-6c78ef9e6262%2Fb0a3afde-449e-4125-bb5f-cc3c52de93b4%2Fgbic25g_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Problem 12-28 (Algo) Working capital requirements in capital budgeting [LO12-4]
The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial
investment in land and equipment will be $260,000. Of this amount, $210,000 is subject to five-year MACRS depreciation.
The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets
will be sold for $50,000. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an
approximate answer but calculate your final answer using the formula and financial calculator methods.
The contract will require an additional investment of $56,000 in working capital at the beginning of the first year and, of this
amount, $36,000 will be returned to the Spartan Technology Company after six years.
The investment will produce $81,000 in income before depreciation and taxes for each of the six years. The corporation is in
a 25 percent tax bracket and has a 6 percent cost of capital.
a. Calculate the net present value.
Note: Do not round intermediate calculations and round your answer to 2 decimal places.
Net present value
b. Should the investment be undertaken?
○ Yes
O No
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