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

question 54

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.
- What is the approximate effective cost now of the working capital component of the investment decision? (Do not round your intermediate calculations and round your final answer to the nearest whole number.)

• A) $0.
• B) $987.
• C) $2,000.
• D) $3,014.

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Definitions:

Budget Line

A graphical representation of all possible combinations of two goods that can be purchased with a given budget and prices.

Product Prices

The amount of money required to purchase a good or service, determined by various factors including production costs, demand, supply, and market competition.

Topographical Map

A type of map characterized by large-scale detail and quantitative representation of relief, usually using contour lines.

Indifference Map

A set of indifference curves, each representing a different level of utility, that together show the preferences of a consumer.