Question

Farah’s Fabulous Fashions (FFF) frequently fabricates fine footwear for famous foreign furriers. However, in her unusually flamboyant style, Farah has decided to bid on a contract to supply the military boots for female soldiers. The contract calls for supplying the military with 100,000 pairs of boots per year over the 5-year life of the project. After spending $250,000 on a feasibility study, Farah believes one of her existing factories can produce the boots after modifying the plant at a cost of $2,600,000. The new plant and equipment will be depreciated to zero over the 5-year life of the project and will have no salvage value. The boots have a variable cost of $44 per pair. Farah’s fixed costs are $900,000 per year. Farah also expects she will be able to sell an additional 25,000 pair of the army boots for $180 per pair to college coeds wanting that military look. Farah’s discount rate is 14% and her tax rate is 40%. What is the minimum price per pair of boots that Farah should bid on the project?

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 to be $20.00, and we calculate the NPV

NPV is -$1,679,934

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

We use GoalSeek in Excel to calculate the minimum bid price.

Minimum bid price is $28.16