Question

You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $210,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the 3-year project life. The equipment can be sold at the end of the project for $34,000. You will also need $21,000 in net working capital for the duration of the project: all net working capital will be recovered at the end of the project. The fixed costs will be $19,000 a year and the variable costs will be $150,000 per park. Your required rate of return is 12 percent and your tax rate is 34 percent. What is the minimal amount you should bid per park? (Round your answer to the nearest $100)

Answer 1

Initial outlay = Fixed Capital investment + Net Working Capital Investment

= 210000+21000 =$231000

Since Variable cost is given as $150000 per park that means $300000 total variable cost for 3 years that means we assume here $100000 per year is the variable cost.

fixed cost is $19000 per year for 3 years

Cash outflow per year for 3 years =19000+100000=119000

Terminal year after tax non operating cash flow(at the end of year 3) :

=salvage value+net working capital investment-tax(salvage value-book value)

=34000+21000-.34(34000-0)= $43440

PV of terminal Cash flow =43440/(1.12)³=30920

Particulars	Time period	PV factor@12%	Amount	PV of the amount
Cash Outflow	0	1	231000	231000
	1	.8929	119000	106255
	2	.7972	119000	94867
	3	.7118	119000	84704

PV= Present Value

The total of the PV of cash outflow = 516826

Total cost of the Parks =PV of Cash outflow - PV ofTerminal year after tax non operating cash flow

= 516826 - 30920 =$485906 i.e $485900

The minimal amount you should bid for the park is $485900.