Bowman Corporation is considering an investment in special-purpose equipment to enable the company to obtain a five-year

Question:

Bowman is considering an investment in special-purpose equipment to enable the company to obtain a five-year government contract for the manufacture of a special item. The equipment costs $500,000 and would have no when the contract expires at the end of the five years. Estimated annual operating results of the project are as follows.
Revenue from contract sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $700,000
Expenses other than depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$400,000 . . . . . . . . . .
Depreciation (straight-line basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 . . . . 500,000
Increase in net income from contract work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000
All revenue and all expenses other than depreciation will be received or paid in cash in the same period as recognized for accounting purposes. Compute the following for Bowman's proposal to undertake the contract work.
a. Payback period.
b. Return on average investment.
c. Net present value of the proposal to undertake contract work, discounted at an annual rate of 10 percent. (Refer to the table in Exhibit 26-4.)
Exhibit 26-6: Summary of Relationships among NPV, the Discount Rate, and Project Acceptability

Bowman Corporation is considering an investment in special-purpose equipment to

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