Question

ABC Corporation needs to purchase 225,000 boxes of needles per year to support its manufacturing operation over the next 7 years. You have decided to bid on the contract. It will cost you $1,230,000 to install the equipment needed for starting production. This equipment will be depreciated using straight-line method to zero over the project's life, and is estimated to have a salvage value of $75,000. You estimate the fixed costs will be $360,000 per year and the variable costs will be $13.20 per box. An initial investment in networking capital is estimated at $112,500, and will be recovered at the end of the project. The tax rate is 32%; What price per box should you bid if you require a rate of return of 13%?

Answer 1

 

So, present value of cash flows at 13% is equal to zero. Initial investment =1230000+112500(net working capital)

Computing Net present value

 

At 13% rate, NPV = 0

0 = 676659.33y - 2154364.7147

676659.33y = 2154364.7147

                 Y = 3.1838

Therefore x = Y + 13.2

                 x = 16.3838

The minimum bid price to be $16.38.