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[answered] Merton Shovel Corporation has decided to bid for a contract


Merton Shovel Corporation has decided to bid for a contract to supply shovels to the Honduran Army.? The Honduran Army intends to buy 1,100 shovels per year for the next 3 years.? To supply these shovels, Merton will he to acquire manufacturing equipment at a cost of $158,000.? This equipment will be depreciated on a straight-line basis over it's 5 year lifetime.? At the end of the 3rd year, Merton can sell the equipment for exactly it's book value($63,200). Additional fixed costs will be $39,000 per year and variable costs will be $2 per shovel.? An additional investment of $23,500 in net working capital will be required when the project is initiated.? This investment will be recovered at the end of the 3rd year.? Merton Shovel has a 35% marginal tax rate and a 15% required rate of return on the project.? What is the lowest possible per shovel price that Merton can offer for the contract and still create value for stockholders?


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