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Homework answers / question archive / Mach Force has a cost-plus-fixed fee contract with the air force to build jets

Mach Force has a cost-plus-fixed fee contract with the air force to build jets

Finance

Mach Force 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 30%. The company has computed the following labor savings for a new equipment that costs $60000:                                                          

                                   Period 1          Period 2                                              

           Before Tax      $35,000         $35,000                                             

           After Tax        $24,500         $24,500                                             

The company has an after-tax time value of money of 7% and the federal government has a before-tax time value of money of 5%. Should the equipment be purchased?

 

Group of answer choices

 

 

COMPANY-YES; GOVT-NO                                                                 

                                                                                               

 

INDETERMINATE

 

COMPANY-NO; GOVT-NO

 

COMPANY-YES; GOVT-YES

 

COMPANY-NO; GOVT-YES

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Computation of NPV:

NPV to the Company =-60000+24500/1.07+24500/1.07^2 =-15,703.55

NPV to the Government =-60000+35000/1.05+3500/1.05^2 =5,079.37

As NPV is negative for the company, the company should not buy the equipment.

As NPV is positive for the government, the government should buy the equipment

 

So, the correct option is 5th "COMPANY-NO; GOVT-YES".