Question: Blackbird has a cost plus fixed fee contract with the air force to build jets. The government will buy any additional equipment that it needs

Blackbird has a cost plus fixed fee contract with the air force to build jets. The government will buy any additional equipment that it needs on a justified cost savings basis. The incremental tax rate for the company is 21%. The company has computed the following labor savings for a new equipment that costs $45000:

Period 1 Period 2

Before Tax $30,000 $30,000

After Tax $23,700 $23,700

The company has an after tax time value of money of 6% and the federal government has a before tax time value of money of 3%. Should the equipment be purchased?

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