Accounting for Decision Making and Control 7th Edition by Jerold Zimmerman

Exercise 31

Watson's Bay
Watson's Bay Co. is considering a contract to manufacture didgeridoos. Producing didgeridoos will require an investment in equipment of $100,000 and operating costs of $15 per didgeridoo produced. The contract calls for the company to deliver 3,000 didgeridoos a year for each of four years at a price of $30 per didgeridoo. At the end of four years the equipment is expected to be sold for $10,000. The equipment will be depreciated as follows: The depreciation factor is applied to the full cost of the equipment (i.e., salvage value is not considered when depreciation is determined). The tax rate is 33 percent and the market rate of return for investments of this risk is 20 percent. Should Watson's Bay Co. take the contract to manufacture didgeridoos?
Source: R. Watts.