Question

The managers of Poncho Parts, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next 5 years. The necessary foundry and machining equipment will cost a total of $800,000 and belongs in a 30% CCA class for tax purposes. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labor and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate.

A. What is the minimum bid price they can quote on this project?

A) $2383

B) $1934

C) $1692

Answer 1

Year	0	1	2	3	4	5
Equipment Cost	-800000					150000
Tax saved on Depreciation		84000	58800	41160	28812	20168.4
Tax paid on salvage value						-5440.4
Fixed Costs		-125000	-125000	-125000	-125000	-125000
Labour costs		-125000	-125000	-125000	-125000	-125000
Tax saved		87500	87500	87500	87500	87500
	(800,000.00)	(78,500.00)	(103,700.00)	(121,340.00)	(133,688.00)	2,228.00
	1	0.8929	0.7972	0.7118	0.6355	0.5674
	(800,000.00)	(70,092.65)	(82,669.64)	(86,369.81)	(84,958.72)	1,264.17	(1,122,826.66)	Total cost net of tax
							585.775125	PV of Revenue per unit net of tax	(3.60477*250*0.65)
							-1916.822021	Per unit

Option B is correct.

Hope it helps you in your studies. Kindly give a thumbs up if you like it. ?