Question

You have the opportunity to bid on a project that involves manufacturing 110,000 units per year for 4 years. The project will require $698,000 in fixed assets that would be depreciated straight-line to zero over the project's life. These assets have an expected pretax salvage value of $149,000 at the end of the project. The project would require $56,000 of net working capital, all of which is recoverable, along with $312,000 in annual expenses. What is the minimum price per unit you should bid on this project if you require a rate of return of 18 percent and have a tax rate of 34 percent?

Answer 1

Below is the NPV calculation:, we needed to find the price at which NPV = 0. We calculate the same by using excel's goal seek function:

Particulars	Remark	0	1	2	3	4
Units Sold	Given		11000	11000	11000	11000
SP	Given		$                  57.32	$                  57.32	$                  57.32	$                  57.32
Sales	SP x Units		$      6,30,517.78	$      6,30,517.78	$      6,30,517.78	$      6,30,517.78
OPEX	Given		$      3,12,000.00	$      3,12,000.00	$      3,12,000.00	$      3,12,000.00
EBITDA	Sales-OPEX		$      3,18,517.78	$      3,18,517.78	$      3,18,517.78	$      3,18,517.78
Depreciation	698000/4		$      1,74,500.00	$      1,74,500.00	$      1,74,500.00	$      1,74,500.00
EBT	EBITDA-Depreciation		$      1,44,017.78	$      1,44,017.78	$      1,44,017.78	$      1,44,017.78
Tax	34% x EBT		$          48,966.04	$          48,966.04	$          48,966.04	$          48,966.04
EAT	EBT-Tax		$          95,051.73	$          95,051.73	$          95,051.73	$          95,051.73
Depreciation	Added back as non cash		$      1,74,500.00	$      1,74,500.00	$      1,74,500.00	$      1,74,500.00
OCF	EAT+Depreciation		$      2,69,551.73	$      2,69,551.73	$      2,69,551.73	$      2,69,551.73
FCINV	Given	$      -6,98,000.00
WCINV	Given	$          -56,000.00				$          56,000.00
FCF	OCF+FCINV	$      -7,54,000.00	$      2,69,551.73	$      2,69,551.73	$      2,69,551.73	$      3,25,551.73
Discount factor Formula	at 18 %	1/(1+0.18)^0	1/(1+0.18)^1	1/(1+0.18)^2	1/(1+0.18)^3	1/(1+0.18)^4
Discount factor	Calculated using above formula	1	0.847457627	0.71818443	0.608630873	0.515788875
DCF	FCF x Discount Factor	$      -7,54,000.00	$      2,28,433.67	$      1,93,587.86	$      1,64,057.51	$      1,67,915.96

Therefore the minimum price it can charge is $57.32 per unit to have a 0 NPV. Any price higher than that will get them a positive NPV and any price lower than that will get them a negative NPV