Reference no: EM132980466
Question - Determining the Bid Price: Maintain-it Inc. is asked to submit a bid for the price per year it would charge to water and spray trees in a new housing development for the next five years.
To provide this service, Maintain-it would have to buy new equipment for $130,000. The equipment would be depreciated straight-line to its estimated salvage value of $30,000 over its five-year useful life for tax purposes, which is standard procedure for equipment like this at Maintain-it. But, at the end of the project, because Maintain-it thinks servicing this particular customer will be especially hard on the equipment, it estimates it will only be able to sell its equipment for $10,000, i.e., at a loss versus the $30,000 salvage value used for the tax depreciation schedule.
Also, Maintain-it would use 3 trucks it currently has, which it could sell now for $50,000 before considering any taxes on the sale. These trucks are already fully depreciated, and will likely be sold in 5 years for a $10,000.
Maintain-it expects its working capital will increase by $30,000 to begin the project, and increase by an additional $10,000 in Year 1.
Total labor and other costs would be $80,000 a year. The tax rate is 25% percent and Maintain-it's cost of capital is 10 percent.
What would Maintain-it's minimum bid price per year need to be if it wants to wind the bid and at least cover its cost of capital? (Round your answer to $100).
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