A construction company entered into a fixed-price contract to build an office building for $46 million. Construction costs incur
2 answers:
<u>Answer:</u>
Revenue in the first year will be $13.8million
Gross Profit is $1.8million
<u> Explanation: </u>
Amount entered into the fixed price contract = Total revenue = $46million
Construction Costs incurred in first year = $12million
Estimated Costs to complete at the end of the year = $28million
Now,
Using the percentage of composition method
Total costs= incurred costs+ estimated costs to complete the work
= $12million + $28million
= $40million
Revenue to recognise = (Incurred Costs/ Total costs) Total Revenue
= ($12million/$40million) $46million
= $13.8million
Hence, Construction costs = $12million
Total Revenue = $13.8million
Gross Profit = Total Revenue – Construction Costs
= $13.8million - $12million
= $1.8million
Therefore, the total revenue in the first year of contract will be $13.8million and the gross profit will be $1.8million
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Answer:
a. Internal Rate of Return
Annual Cash Inflows = (Net Savings - Depreciation) * ( 1 - Tax Rate) + (Depreciation * Tax Rate)
Net savings = Delivery Costs - Operating and Maintenance Costs with the Used Truck
= 32,000 - 21,000
= $11,000
Depreciation = (Cost of used truck - Salvage value) / Useful life
= (13,000 - 2,000) / 3
= $3,667
Annual Cash inflows = $7,000 as there are no taxes.
Use Excel to calculate IRR as shown in the attachment.
The cost of the truck is the outflow and the savings and the salvage value are inflows which means that the last inflow will be $13,000 because salvage value is added in the last year.
IRR = 69.408%
b. If the IRR is greater than the cost of capital or required rate of return, the project should be chosen.
c. The IRR of 69.408% is greater than the MARR of 34% so Nancy should buy the truck.
