Question

Your company has been approached to bid on a contract to sell 19,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.9 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $325,000 to be returned at the end of the project and the equipment can be sold for $650,000 at the end of production. Fixed costs are $1.25 million per year, and variable costs are $135 per unit. The tax rate is 40 percent, and the required return is 13 percent. What bid price should you set for the contract?

Answer 1

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