Question

In: Finance

Martin Enterprises needs someone to supply it with 142,000 cartons of machine screws per year to...

Martin Enterprises needs someone to supply it with 142,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $995,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that, in five years, this equipment can be salvaged for $136,000. Your fixed production costs will be $570,000 per year, and your variable production costs should be $19.05 per carton. You also need an initial investment in net working capital of $124,000. Assume your tax rate is 22 percent and you require a return of 11 percent on your investment. a. Assuming that the price per carton is $29.40, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Assuming that the price per carton is $29.40, find the quantity of cartons per year you can supply and still break even. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) c. Assuming that the price per carton is $29.40, find the highest level of fixed costs you could afford each year and still break even.

Solutions

Expert Solution

a). NPV = 1,773,002.52

Formula Year (n) 0 1 2 3 4 5
Initial investment (II)               995,000
Number of cartons (u)           142,000           142,000           142,000           142,000           142,000
Price per carton (p)                 29.40                 29.40                 29.40                 29.40                 29.40
Variable cost per carton (vc)                 19.05                 19.05                 19.05                 19.05                 19.05
u*p Revenue (R)         4,174,800         4,174,800         4,174,800         4,174,800         4,174,800
u*vc Variable Cost (VC)         2,705,100         2,705,100         2,705,100         2,705,100         2,705,100
Fixed Cost (FC)           570,000           570,000           570,000           570,000           570,000
Depreciation (D)           199,000           199,000 199,000           199,000           199,000
R-VC-FC-D EBIT           700,700      700,700           700,700           700,700           700,700
25%*EBIT Tax @ 22%           154,154           154,154           154,154           154,154           154,154
EBIT - Tax Net income (NI)           546,546           546,546           546,546           546,546           546,546
Add: depreciation (D)           199,000           199,000           199,000           199,000           199,000
NI + D Operating Cash Flow (OCF)           745,546           745,546           745,546           745,546           745,546
NWC             (124,000)           124,000
Salvage price (s)           136,000
s*(1-Tax rate) After-tax salvage price (SV)           106,080
OCF+NWC+SV-II Free Cash Flow (FCF)          (1,119,000)           745,546           745,546           745,546           745,546           975,626
1/(1+d)^n Discount factor @ 11%                     1.000                 0.901                 0.812                 0.731                 0.659                 0.593
FCF*Discount factor PV of FCF    (1,119,000)     671,663.06     605,101.86     545,136.81     491,114.24     578,986.55
Sum of all PVs NPV       1,773,002.52

b). Using Solver and putting the condition of NPV = 0, with changing variable the number of cartons supplied per year, the quantity is 82,577

c). Again using Solver and putting the condition of NPV = 0, with changing variable Fixed cost, the Fixed cost per year is 1,185,028


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