The owner of a small pipeline construction com­pany wants to determine how much he should bid in his attempt to win his first “big” contract. He estimates that his cost to complete the project will be $7.2 million in PW equivalency. He wants to bid an amount that will generate an after-tax rate of return of 15% per year; however, he doesn’t know how much to bid on a before-tax basis. He told you that his effective state tax rate is 12% and his effective federal tax rate is 22% per year.

(a) The equation for determining the overall ef­fective tax rate is:
state rate + (1 ? state rate)(federal rate)
Determine his before-tax MARR in order to realize an after-tax MARR of 15% per year.
(b) How much should he bid?


(a) Effective tax rate = 0.12 + (0.88)(0.22) = 0.314

Before-tax MARR = 0.15/(1 – 0.314)
= 0.218 (21.8%)

(b) Bid amount = 7.2 million/(1 – 0.218)
= $9.2 million

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