ABC Co. a private contractor, wins a bid to construct a railway for the government. The terms of the arrange follows: > Construct a road- completing construction within a year; > Maintain and operate the road for four years. > Resurface the road when the original surface has deteriorated below specified condition. The opera estimates that it will have to undertake the resurfacing at the end of year 3. The operator collects toll fees of P200,000 per year. The contract ends in year 5. The operator estimates th resurfacing expenditure increases by P5,000 for each year that the road is used. The appropriate discount ra contract inception, ABC Co. identifies a single performance obligation for construction services. ABC Co. ma following estimates: Stand Alone Selling Price Forecast cost + 25% YEAR CONTRACT COST Construction Service 200.000

ABC Co. a private contractor, wins a bid to construct a railway for the government. The terms of the arrange follows: > Construct a road- completing construction within a year; > Maintain and operate the road for four years. > Resurface the road when the original surface has deteriorated below specified condition. The opera estimates that it will have to undertake the resurfacing at the end of year 3. The operator collects toll fees of P200,000 per year. The contract ends in year 5. The operator estimates th resurfacing expenditure increases by P5,000 for each year that the road is used. The appropriate discount ra contract inception, ABC Co. identifies a single performance obligation for construction services. ABC Co. ma following estimates: Stand Alone Selling Price Forecast cost + 25% YEAR CONTRACT COST Construction Service 200.000

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Jack Toronto is the newly recruited financial analyst of Von Mining Company Ltd. He has been asked to analyze a proposal to acquire a drilling machine. He received the appropriation capital request. Von Mining Company can purchase the drilling machine for GH¢ 50,000. Von Mining Company Ltd can also lease the drilling machine for GH¢12,200 a year for a 5-year period from Trosky Leasing Ltd. The expected life of the machine is given as 5 years and expected to have a salvage value of GH¢5000 in 5 years’ time. The mining company intends to buy the drilling machine a fair market value at that time. If the mining company decides to buy the machine, it can acquire financing at 20%. It will cost the Mining Company GH¢6,000 in maintenance and insurance of the drilling machine. The tax rate is 34%. Assume depreciation is on straight line basis and lease rentals are tax deductible. (Assume payment is made at the end of the year) Required: a). Calculate NPV to Von Mining Company Ltd of the lease…
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