You are working on a bid to build four cabins a year for the next three years for a local campground. This project requires the purchase of $66,000 of equipment which will be depreciated using straight-line depreciation to a zero book value over the three years. The equipment can be sold at the end of the project for $40,001. You will also need $16,000 in net working capital over the life of the project. The fixed costs will be $18,000 a year and the variable costs will be $88,000 per cabin. Your required rate of return is 14% for this project and your tax rate is 34%. What is the minimal amount (rounded to the nearest $500) that you should bid per cabin?

Question

Quizplus · Accepted Answer

To determine the minimal bid per cabin, calculate the total costs including depreciation, fixed costs, variable costs, and taxes, then find the present value of these costs using the required rate of return. Finally, divide by the number of cabins to find the bid price per cabin.

You Are Working on a Bid to Build Four Cabins