Question

Calculating a Bid Price Your company has been approached to bid on a contract to sell 15,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.4 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $75,000 to be returned at the end of the project, and the equipment can be sold for $200,000 at the end of production. Fixed costs are $700,000 per year, and variable costs are $48 per unit. In addition to the contract, you feel your company can sell 4,000, 12,000, 14,000, and 7,000 additional units to companies in other countries over the next four years, respectively, at a price of $145. This price is fixed. The tax rate is 40 percent, and the required return is 13 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract?

Please provide a breakdown of step by step. Example revenue is quantity * price.

Answer 1

Let the bid price be X

Step 1 : Initial investment

PARTICULARS	AMT IN $
Cost of MAchine	3400000
WorkinG Capital	75000
Total	3475000

Step 2 : Annual Cash Inflow

PARTICULARS	AMT IN $
Sales	15000X
Less: Variable Cost ($48 * 15000 units)	720000
Contribution	15000X-720000
Less : Fixed Cost	700000
Less: Depreciation	850000
Profit	15000X-2270000
Less: Tax @ 40%	6000X-908000
Profit After Tax	9000X-1362000
Add : Depreciation	850000
Cash Inflow	9000X-512000
PVAF{[1/(1+r)n] - 1} / r	2.9744
Discounted Cashflow	26770X-1522893

PARTICULARS	YEAR1	YEAR2	YEAR3	YEAR4
Sales ($145*15000)	580000	1740000	2030000	1015000
Less: Variable Cost ($48 * 15000 units)	192000	576000	672000	336000
Contribution	388000	1164000	1358000	679000
Less: Tax @ 40%	155200	465600	543200	271600
Profit After Tax	232800	698400	814800	407400
PVF(1/r)n	.8849	.7831	.6930	.6133
Discounted Cashflow	206005	546917	564656	249858

Total Annual Cash Inflow = +26770X-1522893+$206005+$546917+$564656+$249858

Total Annual Cash Inflow = +26770X+44543

STEP 3 : TERMINAL CASHFLOW

PARTICULARS	AMT IN $
WORKING CAPITAL	700000
PVF	.6133
TERMINAL INFLOW	429310

NPV = Annual Cash Inflow + Terminal Benefits - Initial Investment

$100000 = 26770X +$44543+$429310 - $3475000

X = $3101147 / 26770

X = $115.84

Bid Price = X = $115.84