Norris Property. has been offered an eight year contract to provide maintenance for

various condominium corporations. To accept the contract the company would

have to purchase several pieces of equipment at a total cost of $320,000. Norris

must provide the seller of the equipment a 40% deposit of the total cost immediately.

The remaining amount owing on the equipment will be repaid in 3 equal annual

payments commencing at the end of year 1.

The salvage value of this equipment at the end of the contract is $30,000

If the contract is accepted, several old fully depreciated, for accounting and tax, pieces

of equipment will be sold for $20,000.

To store some of the new equipment, Norris will have to lease some space

for the eight year period that will cost $5,000 per year. The eight lease payment are

due at the beginning of each year.

The contract allows Norris to charge an hourly rate of $60 for its maintenance services. Expected chargeable hours for the next eight years are as follows:

Chargeable hours per year

Years 1 to 4

20,000

Year 5 to 8

15,000

Variable costs are expected to be $40 per hour with fixed annual

costs of $260,000.

Norris required rate of return is 10% after tax and its tax rate is 30%.

The equipment will qualify for a capital cost allowance rate of 20%

The tax shield formula is as follows:

(C dT)

*

(1+.5r)

-

(SdT)

*

1

(d + r)

(1+r)

(d+r)

(1+r)n

1. Compute the NPV of this contract. Should they enter into this contract?

2. Is the IRR greater than 10%?Briefly explain.

3.What qualitative factors should Norris Ltd. consider when making this

decision to accept the six year contract? Briefly provide 2 factors in point form.

4.If the annual chargeable hours are 10% lower than expected, what would

the NVP now be? Would this decline affect Norris decision to enter into this

contract?Support with computations