You will bid to supply three jets per year for each of the next three years to the Canadian Armed Forces. To get set up, you will need $10 million in equipment, which belongs in a 30% CCA class and will have no salvage value. Total fixed costs per year are $5 million, and variable costs are $7 million per jet. Assuming a tax rate of 30% and a required return of 10%, what is the minimum price at which you should offer to supply the jets?

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To find the minimum price at which to offer the jets, we need to calculate the total costs including the capital cost allowance (CCA) for the equipment, fixed costs, and variable costs, and then determine the price that covers these costs while providing the required return.1. **Capital Costs**: The initial equipment cost is $10 million, which belongs in a 30% CCA class. Over three years, this will depreciate, but since it has no salvage value and we're looking for a minimum price, we can simplify by considering the full cost as part of our expenses over the three years.2. **Fixed Costs**: Total fixed costs are $5 million per year, so over three years, this amounts to $15 million.3. **Variable Costs**: Variable costs are $7 million per jet. Since three jets are supplied each year for three years, that's 9 jets in total. Therefore, total variable costs are $7 million * 9 = $63 million.4. **Total Costs**: Summing these up gives us $10 million (equipment) + $15 million (fixed costs over three years) + $63 million (variable costs) = $88 million.5. **Required Return**: With a required return of 10%, we need to earn not just the $88 million back but also an additional 10% on top of this. Therefore, the total revenue needed is $88 million * 1.10 = $96.8 million.6. **Minimum Price per Jet**: To find the minimum price per jet, divide the total revenue needed by the number of jets, which is 9. So, $96.8 million / 9 jets ≈ $10.76 million per jet.Since none of the options exactly match this calculation, we choose the closest one that covers the costs and required return, which is $11 million each (D). This ensures all costs and the required return are covered.

You Will Bid to Supply Three Jets Per Year for Each