The Diamond Freight Company has been offered a seven-year contract to haul munitions for the government. Since this contract would represent new business, the company would have to purchase several new heavy-duty trucks at a cost of $350,000 if the contract were accepted. Other data relating to the contract follow:

With the motors being replaced after four years, the trucks will have a useful life of seven years. To misc money to assist in the purchase of the new trucks, the company will sell several old, fully depreciated trucks for a total selling price of $16,000. The company requires a 16% after-tax return n all equipment purchases. The tax rate is 30%. For tax purposes, the company computes deprecation deductions assuming zero salvage value and using straight-line depreciation. The new trucks would be depreciated over five years.

Required:

Compute the net present value of this investment opportunity. Round all dollar amounts to the nearest whole dollar. Would you recommend that the contract be accepted?

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Annual net cash receipts (before taxes) from the contract S105,000 Cost of replacing the motors in the trucks in four years $45,000 Salvage value of the trucks at temination of the contract S18,000