Question

Monsoon Inc. is considering bidding on a government project. To do the project, the company must make an initial investment of $8 million to purchase the necessary equipment. The project will last for five years, at the end of which the equipment can be salvaged for $500,000. The equipment has a CCA rate of 30%. The bidding process for the project requires the firm to submit a bid for a constant amount of $X before-tax, to be remitted by the government to the winning bidder each year. The firm’s marginal tax rate is 40%, and the required rate of return on similar projects is 18%. What is the minimum bid that the firm should submit for this project? Round your answer to the nearest dollar.

Answer 1

bidding amount is 3080904.57 each for 5 years.

at this amount at a discount rate of 18%, NPV= 0.

Annual cash flows
Ref	Particulars		0	1	2	3	4	5	5
a	Sales revenue		(80,00,000)	30,80,904.57	30,80,904.57	30,80,904.57	30,80,904.57	30,80,904.57
	Costs:
	Depreciation			24,00,000.00	16,80,000.00	11,76,000.00	8,23,200.00	5,76,240.00
	Total costs			24,00,000.00	16,80,000.00	11,76,000.00	8,23,200.00	5,76,240.00
	Profit before tax			6,80,904.57	14,00,904.57	19,04,904.57	22,57,704.57	25,04,664.57
b	less:tax@ 40%			(2,72,361.83)	(5,60,361.83)	(7,61,961.83)	(9,03,081.83)	(10,01,865.83)
c=a-b	profit after tax		-	4,08,542.74	8,40,542.74	11,42,942.74	13,54,622.74	15,02,798.74
	Add: non cash depreciation		-	24,00,000.00	16,80,000.00	11,76,000.00	8,23,200.00	5,76,240.00
	After tax salvage value								8,37,824.00
d	Net annual cash flow		(80,00,000)	28,08,542.74	25,20,542.74	23,18,942.74	21,77,822.74	20,79,038.74	8,37,824.00
e	Present value factor@ 18%		1	0.847457627	0.71818443	0.608630873	0.515788875	0.437109216	0.43710922
f=d*e	Present value of cashflows		-80,00,000.00	23,80,120.97	18,10,214.55	14,11,380.15	11,23,296.74	9,08,767.00	3,66,220.59
	Total present value of annual cash inflows		0.00

after tax salvage value workings:

Cost	80,00,000
Less accumulated depreciation	66,55,440
Net book value	13,44,560
sale proceeds	5,00,000
Less NBV	13,44,560
Taxable amount	(8,44,560)
Tax benefit@ 40%	(3,37,824)
Net cash proceeds	8,37,824