Vernon company has been offered a 7 year contract to supply a part for the military. After careful study, the company has developed the following estimated data relating to the contract:
Cost of equipment needed $300,000
Working capital needed $50,000
Annual cash receipts from the delivery of parts,
Less cash operating costs $70,000
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%.
Required:
Use the net present value method to determine if the contract should be accepted. Round all computations to the nearest dollar. (Please show all your works!)