Question

You’re a publisher of University Mac Books. A teacher at MSU  has written a new Finance text book & has asked your firm to prepare & print the text book. She is willing to commit to purchasing 22,000 text books over four years. You are at full production, so you need to purchase new printing equipment at a cost of $3.6Million which will be depreciated on a straight line basis over the life of the project & can be sold for $275,000 at the end of 4 years. Additionally, you will need $130,000 in excess working capital which you can recoup later. Fixed costs are $730,000 and variable costs are $50. While this is a customized version, you believe you can sell the text book to other universities as well and, project those sales at 4,500, 12,500, 15,000, & 7,500 at $150 per unit. Your CFO requires that all projects have an NPV of $100,000. Your firms tax rate is 24% and cost of capital is 13%. What price (per textbook) should you bid on the commitment of 22,000?          

Answer 1