Spectral Company has been offered a seven-year contract to supply a part for the space program. 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 of seven years. The working capital would be released for use elsewhere at the end of the contract. The company's after-tax cost of capital is 10%, and its tax rate is 30%. Assume that the salvage value of the Equipment which is received at the end of the contract is NOT subject to tax. Required: PLEASE SHOW ALL OF YOUR CALCULATIONS FOR FULL MARKS. a) Use net present value analysis to determine whether or not the contract should be accepted. Based on your Net Present Value analysis should the contract be accepted? (Round all calculations to the nearest dollar.) THE PRESENT VALUE OF EACH INFLOW AND OUTFLOW OF CASH MUST BE CALCULATED SEPARATELY. FOR EXAMPLE, THE PRESENT VALUE OF THE ANNUAL NET CASH INFLOW MUST BE CALCULATED SEPARATELY FROM THE PRESENT VALUE OF THE CASH INFLOW FROM THE SALVAGE VALUE OF EQUIPMENT.

b) If instead of using a net present value analysis, the company decided to use the payback method in order to decide whether or not to accept this contract, can you think of two drawbacks (i.e. criticisms) with the use of this method? Please state them in no more than two sentences.

c) Suppose that Spectral Company is offered not only the seven-year supply contract stated above, but also a different seven-year supply contract that requires an initial investment of $550,000 instead of the $350,000 required in the above stated contract. Since Spectral Company does not have the financial resources to accept both projects, it must decide between the two. Is there any problem with using the net present value method to rank these two projects? If so, what is, it and how can it be rectified (i.e. corrected)? Your answer should not exceed two sentences.