You are working on a bid to build three amusement parks a year for the next two years. This project requires the purchase of $52,000 of equipment which will be depreciated using straight-line depreciation to a zero book value over the two years. The equipment can be sold at the end of the project for $34,000. You will also need $16,000 in net working capital over the life of the project. The fixed costs will be $10,000 a year and the variable costs will be $70,000 per park. Your required rate of return is 10% for this project and your tax rate is 35%. What is the minimal amount, rounded to the nearest $500, you should bid per amusement park?

Question

Quizplus · Accepted Answer

To find the minimal bid per park, calculate the total costs including depreciation, fixed and variable costs, and taxes, then determine the revenue needed to achieve a 10% return. The equipment depreciation is $26,000 per year, and the tax shield from depreciation is $9,100 per year. The after-tax salvage value is $22,100. The total cost per year is $240,000, and the total revenue needed is $159,500 per year. Dividing by the number of parks (3) gives a bid of $79,500 per park.

You Are Working on a Bid to Build Three Amusement