You are working on a bid to build two city parks a year for the next three years

Question

You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $180,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the 3-year project life. The equipment can be sold at the end of the project for $34,000. You will also need $20,000 in net working capital for the duration of the project. The fixed costs will be $16,000 a year and the variable costs will be $168,000 per park. Your required rate of return is 15 percent and your tax rate is 34 percent. What is the minimal amount you should bid per park? (Round your answer to the nearest $100)

A. $72,500
B. $128,600
C. $154,300
D. $189,100
E. $217,600

Explanation / Answer

$217,600
NI = $75,373.65 - ($180,000/3) = $15,373.65

EBT = $15,373.65/(1 - 0.34) = $23,293.41
Sales = $23,293.41 + ($180,000/3) + $16,000 + ($168,000 2) = $435,293.41

Bid per park = $435,293.41/2 = $217,646.71

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