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

  

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You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $315,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the three-year project life. The equipment can be sold at the end of the project for $115,000. You will also need $22,000 in net working capital for the duration of the project. The fixed costs will be $37,000 a year and the variable costs will be $148,000 per park. Your required rate of return is 14 percent and your tax rate is 21 percent. What is the minimal amount you should bid per park? (Round your answer to the nearest $100) You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $315,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the three-year project life. The equipment can be sold at the end of the project for $115,000. You will also need $22,000 in net working capital for the duration of the project. The fixed costs will be $37,000 a year and the variable costs will be $148,000 per park. Your required rate of return is 14 percent and your tax rate is 21 percent. What is the minimal amount you should bid per park? (Round your answer to the nearest $100)

Answer rating: 100% (QA)

To determine the minimal amount you should bid per park you need to calculate the projects cash flows and then find the present value of those cash flows using your required rate of return Heres how you can calculate the cash flows for each year of the project 1 Initial cash outflow Cost of equipment 315000 Net working capital 22000 Initial cash outflow 315000 22000 337000 2 Annual cash flows Revenue per park Fixed costs Variable costs Revenue per park 37000 148000 185000 Total revenue for two parks per year 185000 2 370000 3 Calculate net income before depreciation and tax Net income Total revenue Variable costs Fixed costs 4 Calculate depreciation expense Depreciation expense per year Cost of equipment Salvage value Useful life Depreciation expense per year 315000 115000 3 66667 5 Calculate taxable income Taxable income Net income Depreciation expense 6 Calculate taxes Taxes Taxable income Tax rate 7 Calculate net income after tax Net income after tax Net income Tax expense 8 Calculate cash flow ... View the full answer