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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

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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
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