Rapid Parcel Service has been offered an eight-year contract to deliver mail and small parcels between military

Question:

Rapid Parcel Service has been offered an eight-year contract to deliver mail and small parcels between military installations. To accept the contract, the company would have to purchase several new delivery trucks at a total cost of $900,000. Other data relating to the contract follow:

Net annual cash receipts (before taxes) from the contract..............................$216,000
Cost of overhauling the motors in the trucks in five years....................................90,000
Salvage value of the trucks at termination of the contract...................................40,000

If the contract was accepted, several old, fully depreciated trucks would be sold at a total price of $60,000. These funds would be used to help purchase the new trucks. For tax purposes, the company computes CCA deductions at 30%. The trucks would be depreciated over eight years for accounting purposes. 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?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...

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