Reference no: EM133042698

Questions -

Q1. You are working on a bid to build two apartment buildings a year for the next three years. This project requires the purchase of $847,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. Ignore bonus depreciation. The equipment can be sold at the end of the project for $415,000. You will also need $165,000 in net working capital over the life of the project. The fixed costs will be $528,000 a year and the variable costs will be $1,640,000 per building. Your required rate of return is 16 percent for this project and your tax rate is 24 percent. What is the minimal amount, rounded to the nearest $100, you should bid per building?

$4,158,400

$4,489,500

$2,065,700

$2,780,600

$2,244,800

Q2. This question uses information from the bidding of apartment building question. Your financial advisor based on the market research advised you that the variable cost for each building is likely to exceed 1,640,000 used to compute the bid in the apartment building question question. The advisor suggested that you bid $2.5million for each building. This bid will make the project NPV positive even under the increased variable cost. The advisor, however, does not provide an estimate of the increased variable cost. If you bid the suggested amount of $2.5million for each building, what is the maximum variable cost per building that allows you to bid for the project (i.e project NPV=0). Assume that other than the variable cost and the new bid of $2.5million, all other information from the apartment building question are valid.

a. $2,543,241

b. $2,316,741

c. $2,074,287

d. $3,074,287