Rapid Parcel Service has been offered an eight-year contract to deliver mail and small parcels between army installations. To accept the contract, the company would have to purchase several new delivery trucks at a total cost of $450,000. Other data relating to the contract follow:
Net annual cash receipts (before taxes)
from the contract . . . . . . . . . . . . . . . . $108,000
Cost of overhauling the motors
in the trucks in five years . . . . . . . . . . $45,000
Salvage value of the trucks at
termination of the contract . . . . . . . . . $20,000
If the contract were accepted, several old, fully depreciated trucks would be sold at a total price of $30,000. These funds would be used to help purchase the new trucks. For tax purposes, the company computes depreciation deductions assuming zero Salvage value and uses straight-line depreciation. The trucks would be depreciated over eight years. The company requires a 12% after-tax return on all equipment purchases. The tax rate is 30%.
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?