. You are working on a bid to build two city parks a year for the...

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. You are working on a bid to build two city parks a year forthe next three years. This project requires the purchase of$180,000 of equipment that will be depreciated using straight-linedepreciation to a zero book value over the 3-year project life. Theequipment can be sold at the end of the project for $34,000. Youwill also need $20,000 in net working capital for the duration ofthe project. The fixed costs will be $16,000 a year and thevariable costs will be $168,000 per park. Your required rate ofreturn is 15 percent and your tax rate is 34 percent. What is theminimal amount you should bid per park?
A. $72,500
B. $128,600
C. $154,300
D. $189,100
E. $217,600
Please give detailed explanation about how to get each value

Answer & Explanation Solved by verified expert

3.7 Ratings (366 Votes)

Annual after tax operating cost:
Fixed cost	16000
Variable cost	336000
Depreciation (180000/3)	60000
Total cost	412000
Less: Tax @ 34%	140080
After taxx cost	271920
Less: Dep	60000
Annual after tax cash outflows	211920

Annual after tax cash outflows	211920
Annuity PVF at 15% for 3yrs	2.28323
Present value of cash outflows		483862.1
Initial investment		180000
Investmemnt of WC		20000
Less: After tax salvage (34000-34%)*0.657516		14754.66
Less: Release of investment (20000*0.657516)		13150.32

Net present outflows		655957.1
Divide: Annuity PVF		2.28323
Annual after tax revenue		287293.5
Add: tax @ 34% (287293.5/66*34)		147999.7
Total revenue required		435293.2
Divide: Number of plots		2
Bid price per plot		217646.6

Answer is E 217600.

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Transcribed Image Text

. You are working on a bid to build two city parks a year forthe next three years. This project requires the purchase of$180,000 of equipment that will be depreciated using straight-linedepreciation to a zero book value over the 3-year project life. Theequipment can be sold at the end of the project for $34,000. Youwill also need $20,000 in net working capital for the duration ofthe project. The fixed costs will be $16,000 a year and thevariable costs will be $168,000 per park. Your required rate ofreturn is 15 percent and your tax rate is 34 percent. What is theminimal amount you should bid per park?A. $72,500B. $128,600C. $154,300D. $189,100E. $217,600Please give detailed explanation about how to get each value