Reference no: EM132980453

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 $249,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the three-year project life. Ignore bonus depreciation. The equipment can be sold at the end of the project for $115,000. You will also need $18,000 in net working capital for the duration of the project. The fixed costs will be $37,000 a year and the variable costs will be $148,000 per park. Your required rate of return is 14 percent and your tax rate is 21 percent.

Required -

a) What is the minimal amount you should bid per park?

b) Assume their marketing teams informs them that they cannot bid more then $1,800,000 per building. How much should they reduce variable cost in order to make the bid at $1,800,000?