Question

In: Finance

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

  1. You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $185,000 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 $18,000 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)

show work please I have no idea how to do this

Solutions

Expert Solution

Time line 0 1 2 3
Cost of new machine -185000
Initial working capital -20000
=Initial Investment outlay -205000
0 0 0
Variable operating cost -168000 -168000 -168000
Fixed cost -18000 -18000 -18000
-Depreciation Cost of equipment/no. of years -61666.67 -61666.667 -61666.67
=Pretax cash flows -247666.7 -247666.67 -247666.7
-taxes =(Pretax cash flows)*(1-tax) -163460 -163460 -163460
+Depreciation 61666.667 61666.6667 61666.667
=after tax operating cash flow -101793.3 -101793.33 -101793.3
reversal of working capital 20000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 22440
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 42440
Total Cash flow for the period -205000 -101793.3 -101793.33 -59353.33
Discount factor= (1+discount rate)^corresponding period 1 1.15 1.3225 1.520875
Discounted CF= Cashflow/discount factor -205000 -88515.94 -76970.384 -39025.78
NPV= Sum of discounted CF= -409512.11

Present value of the overall costs of the project = NPV = 409512.11, minimum bid price should be equal to this value

I have assumed the working capital change only at the beginning as wording is not clear, if the answer is not correct this may be the reason, so let me know and I will apply it on all the years , if you any more questions let me know in the comment

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

. You are working on a bid to build two city parks a year for the...
. 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...
F- You are working on a bid to build two city parks a year for the...
F- You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $249,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the three-year project life. Ignore bonus depreciation. The equipment can be sold at the end of the project for $115,000. You will also need $18,000 in net working capital for the duration of the project. The fixed costs will...
You will bid to supply 5 Navy Destroyers per year for each of the next three...
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...
You will bid to supply 5 Navy Destroyers per year for each of the next three...
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 is the...
You will bid to supply 5 Navy Destroyers per year for each of the next three...
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 is the...
You will bid to supply 5 Navy Destroyers per year for each of the next three...
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 is the...
We are working on a project. Two companies have bid on the project and we are...
We are working on a project. Two companies have bid on the project and we are choosing from two machines. This is a mutually exclusive project, we must pick one machine or the other but cannot pick both. Machine A has an initial cost of $19,500 and a salvage value of $7500 (today's value) at the end of its 12 year life. Machine B has an initial cost of $17,900 and a salvage value of $2300 (today's value) at the...
You are working on a bid for a contract. Thus far, you have determined that you...
You are working on a bid for a contract. Thus far, you have determined that you will need $156,000 for fixed assets and another $32,000 for net working capital at Time 0. You have also determined that you can recover $68,400 after-tax for the combined fixed assets and net working capital at the end of the 4-year project. What must be the annual operating cash flow each year, if the IRR of the project is 16 percent ? Select one:...
The city maintains a landfill that has been recorded during the current year within its parks....
The city maintains a landfill that has been recorded during the current year within its parks. The landfill generated program revenues of $4,000 in Year 4 and cash expenses of $15,000. It also paid $3,000 cash for a piece of land. These transactions were recorded as would have been anticipated, but no other recording was made this year. The city assumes that it will have to pay $200,000 to clean up the landfill when it is closed in several years....
Imagine that you have been asked by Amazon to submit a bid to build, own and...
Imagine that you have been asked by Amazon to submit a bid to build, own and maintain a distribution facility on a remote offshore island off Northeast Canada. The island has a significant population, but no bridges to the mainland. Air and ferry services are very limited. Using economic terminology, discuss what sort of considerations you would take into account when considering the transactions costs associated with this project. What actions would you take to protect your investment should you...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT