Below is the entire question. I cant figure out how the answers are found. specifiaclly, where does 830000 come from? the bottom half is a solution paper i have.

5. Capital budgeting (24 points)

Golden Flights, Inc., is considering buying some specialized machinery that would enable the company to obtain a six-year government contract for the design and engineering of a futuristic plane. The machinery costs $975,000 and must be destroyed for security reasons at the end of the six-year contract period. The estimated annual operating results of the project are as follows:

All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. You are to compute the following three factors for this project:

(a) Payback period: __________ years

(b) Return on average investment: __________%

(c) Net present value of the investment in this machinery, discounted at an annual rate of 12% (an annuity table shows that the present value of $1 received annually for six years discounted at 12% is 4.111): $__________

-----------------------------------------------------------

5. Capital budgeting (24 points)

Golden Flights, Inc., is considering buying some specialized machinery that would enable the company to obtain a six-year government contract for the design and engineering of a futuristic plane. The machinery costs $975,000 and must be destroyed for security reasons at the end of the six-year contract period. The estimated annual operating results of the project are as follows:

All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. You are to compute the following three factors for this project:

(a) Payback period: 2.35 years

Year before full recovery (2) + Uncovered costs at start of the year(975,000-830,000)/Cash flow during the tear (415000)

(b) Return on average investment: 25.90%

Cash in flow(2,490,000) – Initial Investment(975,000 ) / life span of investment (6)/ Annual profit/initial investment x 100

(c) Net present value of the investment in this machinery, discounted at an annual rate of 12% (an annuity table shows that the present value of $1 received annually for six years discounted at 12% is 4.111): $731,065

Annual Cash Flow (415,000) x Discount Factor (4.11) – Initial Investment (975,000)

5. Capital budgeting (24 points)

Golden Flights, Inc., is considering buying some specialized machinery that would enable the company to obtain a six-year government contract for the design and engineering of a futuristic plane. The machinery costs $975,000 and must be destroyed for security reasons at the end of the six-year contract period. The estimated annual operating results of the project are as follows:

All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. You are to compute the following three factors for this project:

(a) Payback period: __________ years

(b) Return on average investment: __________%

(c) Net present value of the investment in this machinery, discounted at an annual rate of 12% (an annuity table shows that the present value of $1 received annually for six years discounted at 12% is 4.111): $__________

-----------------------------------------------------------

5. Capital budgeting (24 points)

Golden Flights, Inc., is considering buying some specialized machinery that would enable the company to obtain a six-year government contract for the design and engineering of a futuristic plane. The machinery costs $975,000 and must be destroyed for security reasons at the end of the six-year contract period. The estimated annual operating results of the project are as follows:

All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. You are to compute the following three factors for this project:

(a) Payback period: 2.35 years

Year before full recovery (2) + Uncovered costs at start of the year(975,000-830,000)/Cash flow during the tear (415000)

(b) Return on average investment: 25.90%

Cash in flow(2,490,000) – Initial Investment(975,000 ) / life span of investment (6)/ Annual profit/initial investment x 100

(c) Net present value of the investment in this machinery, discounted at an annual rate of 12% (an annuity table shows that the present value of $1 received annually for six years discounted at 12% is 4.111): $731,065

Annual Cash Flow (415,000) x Discount Factor (4.11) – Initial Investment (975,000)

## This question was asked on Jan 18, 2013.

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