The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will b $225,000. Of this amount, $180,000 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 $45,000. The depreciated assets will have zero resale value. Use Table 12-12. The contract will require an additional investment of $51,000 in working capital at the beginning of the first year and, of this amount, $31,000 will be returned to the Spartan Technology Company after six years.
The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will b $225,000. Of this amount, $180,000 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 $45,000. The depreciated assets will have zero resale value. Use Table 12-12. The contract will require an additional investment of $51,000 in working capital at the beginning of the first year and, of this amount, $31,000 will be returned to the Spartan Technology Company after six years.
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:The Spartan Technology Company has a proposed contract with the Digital
Systems Company of Michigan. The initial investment in land and equipment will be
$225,000. Of this amount, $180,000 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 $45,000. The
depreciated assets will have zero resale value. Use Table 12-12.
The contract will require an additional investment of $51,000 in working capital at
the beginning of the first year and, of this amount, $31,000 will be returned to the
Spartan Technology Company after six years.
The investment will produce $70,000 in income before depreciation and taxes for
each of the six years. The corporation is in a 25 percent tax bracket and has a 8
percent cost of capital.
a. Calculate the net present value. (Do not round intermediate calculations and
round your answer to 2 decimal places.)
Net present value
$
12,240.00
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