You are working on a bid to build two apartment buildings a year for the next 5

Question

You are working on a bid to build two apartment buildings a year for the next 5 years for a local college. This project requires the purchase of $750,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. The equipment can be sold at the end of the project for $325,000. You will also need $140,000 in net working capital over the life of the project. The fixed costs will be $628,000 a year and the variable costs will be $1,298,000 per building. Your required rate of return is 14.5 percent for this project and your tax rate is 35 percent. What is the minimal amount, rounded to the nearest $100, you should bid per building?

A. $1,423,700
B. $1,489,500
C. $1,733,000
D. $2,780,600
E. $3,465,900

Explanation / Answer

ou are working on a bid to build two apartment buildings a year for the next 5 years for a local college. This project requires the purchase of $750,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. The equipment can be sold at the end of the project for $325,000. You will also need $140,000 in net working capital over the life of the project. The fixed costs will be $628,000 a year and the variable costs will be $1,298,000 per building. Your required rate of return is 14.5 percent for this project and your tax rate is 35 percent. What is the minimal amount, rounded to the nearest $100, you should bid per building? A. $1,423,700 B. $1,489,500 C. $1,733,000 D. $2,780,600 E. $3,465,900 NI = $209,750.30 - ($750,000/5) = $59,750.30 EBT = $59,750.30/(1 - 0.35) = $91,923.54 Sales = $91,923.54 + ($750,000/5) + $628,000 + ($1,298,000 2) = $3,465,923.54 Bid per building = $3,465,923.54/2 = $1,732,961.77

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