GH Company has been offered a seven-year contract to supply a part for the government. After careful study, the company has estimated the following data relating to the contract:

Cost of Equipment Needed………………………………….....................……………………….$300,000

Working Capital Needed………………………………………………………….........................……50.000

Annual Cash Receipts from the Delivery of Parts……………………………………...........100,000

Annual Cash Operating Costs…………………………………………………………......................30.000

Salvage Value of Equipment at Termination of the Contract.....................................5,000

It is not expected that the contract would be extended beyond the initial contract period. The company's discount rate is 10%. (Ignore income taxes in this problem.)

Required:

1) Use the net present value method to determine if the contract should be accepted. Round all computations to the nearest dollar.

2) Use the payback method to determine if the contract should be accepted. Assume GH Company requires a low-year payback period.

Answer rating: 100% (QA)

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