Question

You will bid to supply 5 Navy Destroyers per year for each of the next three years to the U.S. Navy. To get set up you will need $90 million in equipment, to be depreciated straight-line to zero over the next three years, with no salvage value. Total fixed costs per year are $10 million, and variable costs are $15 million per Destroyer. Assume a tax rate of 35 percent and a required return of 12 percent. What is the minimum price per destroyers you should bid to the U.S. Department of Defense? (You may round your answer to the nearest dollar.) $ 26,276,322 $ 25,941,260 $ 25,298,895 $ 24,362,321 $ 23,987,549

Answer 1

Operating cash flow (OCF) each year = income after tax + depreciation

NPV is calculated using NPV function in Excel

First, we assume the bid price per destroyer to be $20,000,000, and we calculate the NPV.

NPV is -$41,362,917

The minimum bid price is where the NPV is at least $0.

We calculate the minimum bid price using GoalSeek in Excel

minimum bid price is $25,298,895