The Morgan Company Has Been Awarded a Six-Year Contract to Provide

question 156

Multiple Choice

The Morgan Company has been awarded a six-year contract to provide repair service to a commercial bus line. Morgan Company has gathered the following data associated with the items needed for this contract:
$\begin{array}{|l|r|}\hline \text { Cost of the Special equipment needed now } & \$ 300,00 \\\hline \text { Working capital needed now } & \$ 80,000 \\\hline \text { Net annual operating cash inflows } & \$ 120,000 \\\hline \text { Equipment maintenance overhaul at the End of Four Years } & \$ 20,000 \\\hline \text { Salvage Value of the Equipment in six Years } & \$ 20,000 \\\hline\end{array}$
The special equipment is in Class 7 with a maximum $15 \% \mathrm { CCA }$ rate. The income tax rate is $40 \%$ , and Morgan's after-tax cost of capital is $14 \%$ . At the end of six years, the working capital will be released for use elsewhere.
- The present value of the after-tax cash from the sale of the equipment at the end of six years is closest to which of the following? (Do not round your intermediate calculations.)

• A) $0.
• B) $3,645.
• C) $5,467.
• D) $9,112.

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Definitions:

Minimum Lease Payments

The least amount of payments over the lease term that the lessee is obligated to make to the lessor.

Residual Value Guarantee

An assurance provided by a party (usually lessor or seller) that guarantees a minimum future value for an asset at the end of its lease term.

Present Value

The current value of a future amount of money or stream of cash flows given a specified rate of return.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year, calculated as current assets divided by current liabilities.