What is the lowest possible per shovel price

Reference no: EM131914371

Problem

Merton Shovel Corporation has decided to bid for a contract to supply shovels to the Honduran Army. The Honduran Army intends to buy 1,100 shovels per year for the next 3 years. To supply these shovels, Merton will have to acquire manufacturing equipment at a cost of $156,000. This equipment will be depreciated on a straight-line basis over its five-year lifetime. At the end of the third year, Merton can sell the equipment for exactly its book value ($62,400). Additional fixed costs will be $40,000 per year, and variable costs will be $2 per shovel. An additional investment of $22,100 in net working capital will be required when the project is initiated. This investment will be recovered at the end of the third year. Merton Shovel has a 35 percent marginal tax rate and a 16 percent required rate of return on the project. What is the lowest possible per shovel price that Merton can offer for the contract and still create value for its stockholders?

Reference no: EM131914371

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