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?