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

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.

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Access For Free