Question

Consider a project to supply 108 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,745,000 five years ago; if the land were sold today, it would net you $1,820,000 aftertax. The land can be sold for $1,756,000 after taxes in five years. You will need to install $5.75 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project’s five-year life. The equipment can be sold for $745,000 at the end of the project. You will also need $615,000 in initial net working capital for the project, and an additional investment of $58,000 in every year thereafter. Your production costs are .56 cents per stamp, and you have fixed costs of $1,130,000 per year.

If your tax rate is 24 percent and your required return on this project is 10 percent, what bid price should you submit on the contract?

Answer 1

Please rate Thumbs up