Thor Industries is bidding on a contract for a 2-year investment project. The customer requires you to
Question:
Thor Industries is bidding on a contract for a 2-year investment project. The customer requires you to produce 500,000 widgets per year and the operating costs to produce that quantity of widgets is $3.25 million per year. The project will require an initial investment of $250 million for equipment that will be depreciated straight-line to zero over the two-year life. The equipment is expected to be scrapped for $10 million at the end of the project. The project will also require a $62.5 million initial investment in working capital. The firm’s marginal tax rate is 35% and their required rate of return on investments of similar risk is 12%. What minimum price should they bid per unit in order to earn their required return if they win the contract?
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow