Question
XYZ is working on a bid to build one apartment buildings a year for the next four years. The equipment for project requires investment of
XYZ is working on a bid to build one apartment buildings a year for the next four years. The equipment for project requires investment of $907,000 which will be depreciated using straight-line depreciation to a zero book value over the project's life. The equipment can be sold at the end of the project for $215,000. You have a piece of land which you plan to use for the project. The land can be sold for $790,000 today after taxes. In four years, the land is expected to net $855,000 after taxes. You will also need $150,000 in net working capital initially and another $10,000 in years 1, 2, and 3. All the NWC investment will be recovered at the end of the project. The fixed costs are $600,000 a year and other costs will be $1,640,000 per building. Your required rate of return is 16 percent for this project and your tax rate is 21 percent. What is the minimal amount, XYZ should bid per building if you want the project to have an NPV of $100,000
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