Reference no: EM132964700

Question - Better-Rock & Co. is bidding on a contract to supply a special type of geophone used in oil exploration. The contract calls for the supply of 80,000 units per year for 3 years. The equipment required to produce these geophones has an estimated installed cost of $4.2 million. An estimated $200,000 will need to be invested in net working capital (to be recovered at project end). The equipment will be depreciated fully on a straight-line basis on a 6-year schedule, and sold at the end of 3 years for an expected $2.2 million.

Annual fixed operating costs (other than depreciation) are expected to be $320,000. Variable operating costs should amount to 35% of sales revenue. Better-Rock & Co. has a required return of 10% on this project. The company faces a marginal tax rate of 25%. What per-unit price should Better-Rock bid at a minimum?