Question

How do you find the value using a scientific calculator?

35. You are working on a bid to build three amusement parks a year for the next two years. This project requires the purchase of $52,000 of equipment which will be depreciated using straight-line depreciation to a zero book value over the two years. The equipment can be sold at the end of the project for $34,000. You will also need $16,000 in net working capital over the life of the project. The fixed costs will be $10,000 a year and the variable costs will be $70,000 per park. Your required rate of return is 10% for this project and your tax rate is 35%. What is the minimal amount, rounded to the nearest $500, you should bid per amusement park? A. $20,000 B. $66,500 C. $68,000 D. $74,000 E. $79,500

Answer 1

Step 1: Calculate annual cash flows for each year

Annual Revenue (Revenue per park x Number of parks)

= $70,000 x 3

= $210,000 per year

Annual Operating Cost

= Fixed Costs + Variable Costs

= $10,000 + $70,000 x 3

= $10,000 + $210,000

= $220,000 per year

Annual Depreciation Expense

= Equipment Cost / Useful Life

= $52,000 / 2

= $26,000 per year

Net Annual Cash Flow

= Annual Revenue - (Annual Operating Cost + Annual Depreciation Expense)

= $210,000 - ($220,000 + $26,000)

= $210,000 - $246,000

= -$36,000 per year

Step 2: Calculate the present value of cash flows for each year using the required rate of return (10%)

PV of Year 1 Cash Flow

= Net Annual Cash Flow / (1 + r)^t

= -$36,000 / (1 + 0.10)^1

= -$36,000 / 1.10

= -$32,727.27 (rounded to 2 decimal places)

PV of Year 2 Cash Flow (considering salvage value)

= (Net Annual Cash Flow + Salvage Value) / (1 + r)^t

= (-$36,000 + $34,000) / (1 + 0.10)^2

= -$2,000 / 1.21

= -$1,652.89 (rounded to 2 decimal places)

Step 3: Calculate the total present value of the project

Total Present Value

= PV of Year 1 Cash Flow + PV of Year 2 Cash Flow

= -$32,727.27 + -$1,652.89

= -$34,380.16 (rounded to 2 decimal places)

Step 4: Calculate the minimum bid per amusement park

Number of Amusement Parks = 3 parks per year for 2 years = 6 parks in total

Minimum Bid Per Amusement Park

= Total Present Value / Number of Amusement Parks

= -$34,380.16 / 6

= -$5,730.03 (rounded to 2 decimal places)

Since bids can't be negative, we'll consider the positive value:

Minimum Bid Per Amusement Park ≈ $5,730

Therefore, the minimal amount you should bid per amusement park (rounded to the nearest $500) is $5,500. So, the correct answer is not listed among the options provided.