You Are Working on a Bid to Build Ten Cabins

question 122

Multiple Choice

You are working on a bid to build ten cabins a year for the next four years for a local campground. This project requires the purchase of $215,000 of equipment which will be depreciated using
Straight-line depreciation to a zero book value over four years. The equipment can be sold at the
End of the project for $149,001. You will also need $28,000 in net working capital for the life of the
Project. Your fixed costs will be $22,000 a year and the variable costs will be $127,000 per cabin.
Your required rate of return is 13% for this project and your tax rate is 35%. What is the minimum
Amount, rounded to the nearest $100, you should bid per cabin?

• A) $133,700
• B) $134,900
• C) $135,600
• D) $137,800
• E) $138,200

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Definitions:

Cash Operating Expenses

Expenses that a company incurs during its day-to-day operations that require cash outflow.

After-Tax Discount Rate

The net discount rate that takes into account the tax implications affecting the net cost of investments or capital projects.

Working Capital

Working capital refers to the difference between a company's current assets and current liabilities. It is an indicator of a company's operational liquidity and short-term financial health.

After-Tax Discount Rate

A discount rate that has been adjusted to reflect the impact of taxes.