Question

You will bid to supply 5 Navy Destroyers per year for each of the next three years to the U.S. Navy. To get set up you will need $90 million in equipment, to be depreciated straight-line to zero over the next three years, with no salvage value. Total fixed costs per year are $10 million, and variable costs are $15 million per Destroyer. Assume a tax rate of 35 percent and a required return of 12 percent. What are total costs per year associated with this Navy Project?

Answer 1

total costs per year = Total fixed costs per year + Total variable costs per year + Depreciation per year

Total variable costs per year = variable costs per destroyer*no. of destroyer supplied in a year = $15 million*5 = $75 million

Depreciation per year = (cost of equipment - salvage value)/life of equipment = ($90 million - $0)/3 = $90 million/3 = $30 million

total costs per year = $10 million + $75 million + $30 million = $115 million

total costs per year associated with this Navy Project are $115 million.