Question

You will bid to supply 5 Navy Destroyers per year for each of the next three years to the U.S. Navy. To get set up you will need $90 million in equipment, to be depreciated straight-line to zero over the next three years, with no salvage value. Total fixed costs per year are $10 million, and variable costs are $15 million per Destroyer. Assume a tax rate of 35 percent and a required return of 12 percent. What are total costs per year associated with this Navy Project? $10,000,000 $15,000,000 $75,000,000 $85,000,000 $92,000,000

Answer 1

Total Cost = $ 85,000,000

Working:

Calculation of Total Cost per year:

Total Cost per year = Fixed Cost Per year + Variable Cost per year

(given in ques,

Fixed Cost per year = $10 million = $ 10,000,000

Variable Cost = $ 75,000,000 [WN1])

So, Total Cost per year = 10,000,000 + 75,000,000

Therefore,

Total Cost per year = $ 85,000,000

WN 1:

Calculation of Variable Cost per year:

Variable Cost per year = Variable cost per destroyer x Number of Destroyers

(given in ques,

Variable cost per destroyer = $ 15 million = $ 15,000,000

Number of Destroyers = 5 )

So, Variable Cost per year = $ 15,000,000 x 5

Therefore,

Variable Cost per year = $ 75,000,000