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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. 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
Expert Solution
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".
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