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

Question

You are working on a bid to build two city parks for 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 networking 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 return is 15 percent and your tax rate is 34 percent. What is the minimal amount you should bid per park? (round to nearest $100)

$72,500
$128,600
$154,300
$189,100
$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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