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Vernal Company has been offered a seven-year contract to supply a part for the military. After...

Vernal Company has been offered a seven-year contract to supply a part for the military. After careful study, the company has developed the following estimated data relating to the contract:

Cost of equipment needed $300,000
Working capital needed to carry inventories $50,000
Annual Net Cash Inflow $90,000
Salvage Value of Equipment $10,000



The equipment above would be in Class 7 with a 15% CCA rate. The company would take the maximum CCA allowable each year. It is not expected that the contract would be extended beyond the initial contract period. The company's after-tax cost of capital is 10%, and the tax rate is 30%.

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