Depreciation to zero book value over the project life

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Reference no: EM131875264

Safety Third Construction Corp is bidding upon a service contract for Mizzou to maintain and upgrade three classrooms per year for the next nine years.

The contract will require purchasing $872,000 in equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. The equipment can be sold for $325,000 at the end of the service contract. They will also need $140,000 in net working capital over the life of the contract.

While performing the contract work, they expect to incur fixed costs of $500,000 per year and a variable cost of $151,000 per classroom. They will also face a corporate tax rate of 40%.

If the required rate of return is 15%, what is the minimum offer they can make per classroom and still turn an economic profit?

Reference no: EM131875264

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