Bionic Labs is considering buying equipment, which would enable the company to obtain a five-year research contract. The specialized equipment costs $600,000 and will have no salvage value when the five-year contract period is over. The estimated annual operating results of the project are as follows:
Revenue .................. $700,000
Expenses (including straight-line depreciation) ...(600,000)
Increase in net income ............$100,000
All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.
Refer to the information above. Compute the net present value of this investment, using a discount rate of 12%. (An annuity table shows that the present value of $1 received annually for five years, discounted at 12%, is 3.605.)
1. $142,500.
2. $193,100.
3. $360,500.
4. $793,100.