Better-Rock & Co is bidding on a contract to supply 85000 units per year for 3 years

Better-Rock & Co is bidding on a contract to supply 85000 units per year for 3 years

Better-Rock & Co. is bidding on a contract to supply 85,000 units per year for 3 years of a special type of geophone used in oil exploration.  The equipment required to produce these geophones has an installed cost of $4.2 million.  An estimated $200,000 will have to be invested initially in net working capital (to be recovered at project end).  The equipment will be depreciated on a straight-line basis on a 5-year schedule, and sold at the end of 3 years for an estimated $2.2 million.

Annual fixed operating costs (other than depreciation) are expected to be $320,000.  Variable operating costs should amount to 30% of sales revenue.  Better-Rock & Co. has a required return of 12% on this project.  Its marginal tax rate is 35%.  What per-unit price should Better-Rock bid at a minimum?