Homework answers / question archive / The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan

The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan

Finance

Share With

The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $120,000. Of this amount, $70,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $50,000. 333 The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate your points final answer using the formula and financial calculator methods. 

The contract will require an additional investment of $55,000 in working capital at the beginning of the first year and, of this amount, $25,000 will be returned to the Spartan Technology Company after six years. The investment will produce $50,000 in income before depreciation and taxes for each of the six years. The corporation is in a 25 percent tax bracket and has a 10 percent cost of capital. 
a. Calculate the net present value. (Do not round intermediate calculations and round your final answer to 2 decimal places.) 
b. Should the investment be undertaken? 
 

An asset was purchased three years ago for $120,000. It falls into the five-year category for MACRS depreciation. The firm is in a 25 percent tax bracket. 
 a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $15,060. 

b. Compute the gain and related tax on the sale if the asset is sold now for $56,060. (Do not round intermediate calculations and round your answers to whole dollars.)