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?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6b477c55-c6ec-4324-8bf3-cfe0ccde6cbf%2F5859e63d-de46-48f2-b33f-89bd6ad829be%2F9q0jeqh_processed.png&w=3840&q=75)
Transcribed Image Text: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?
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