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?