Sheldon Coopers Lab Services (SCLS) is bidding upon a service contract to maintain and upgrade 5 of the University's science labs per year for the next six years. The contract will require purchasing $972,000 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 $226,000 per lab. They will also face a corporate tax rate of 21%. If the required rate of return is 15%, what is the minimum offer they can make per lab and still turn an economic profit?

Sheldon Coopers Lab Services (SCLS) is bidding upon a service contract to maintain and upgrade 5 of the University's science labs per year for the next six years. The contract will require purchasing $972,000 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 $226,000 per lab. They will also face a corporate tax rate of 21%. If the required rate of return is 15%, what is the minimum offer they can make per lab and still turn an economic profit?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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