Question

Managerial Accounting – BADM 2010F19Assignment 8 Chapter 13

Please, Can someone help me with this Accounting Question?

Managerial Accounting - BADM 2010 F19 Assignment 8 Chapter 13 Ramona Company has been offered a eight-year contract to supply a part for the government. After careful study, the company has estimated the following data relating to the contract: Cost of Equipment Needed Working Capital Needed Annual Cash Receipts from the Delivery of Parts Annual Cash Operating Costs Salvage Value of Equipment at Termination of the Contract $200,000 50,000 100,000 30,000 5,000 It is not expected that the contract would be extended beyond the initial contract period. The company's discount rate is 12%. (Ignore income taxes in this problem.) Required: 1) Use the net present value method to determine if the contract should be accepted. Round all computations to the nearest dollar. 2) Use the payback method to determine if the contract should be accepted. Assume GH Company requires a three-year payback period 3) Calculate the Accrual Accounting Rate of Return 4) Given your calculations, should GH Company accept the contract?

Answer 1

Answer is given below

For NPV calculation it is assumed working capital is released at the end of 8th year

Annual cash receipts Annual cash payments Annual cash inflow $100,000 $30,000 $70,000 Initial investment Cost of Equipment Working Capital Total Initial investment $200,000 $50,000 $250,000 1) Net Present Value Cash inflows $70,000 $50,000 $5,000 Annual cash inflow Release of Working capital Salvage value Present value of cash inflows Initial investment Net present value PV of PV Cash Factor flows 4.9676 $347,735 0.4039 $20,194 0.4039 $2,019 $369,948 $250,000 $119,948 Since NPV is positive the contract should be accepted 2) Payback period Initial investment- Cost of Equipment | $200,000 annual cash inflows $70,000 2.86 Years Since payback period is less than 3 years contract should be accepted 3) Accounting rate of return Annual cash inflow $70,000 Less: Depreciation $24,375 Net income $45,625 Depreciation - Investment - Scrap value / number of years life Net Income Initial Investment $45,625 $200,000 22.81% | 4) Since NPV is positive and payback is as per requirement contract should be accepted