Question
In: Finance
Consider a project to supply 100 million postage stamps per year to the US Postal Service...
Consider a project to supply 100 million postage stamps per year to the US Postal Service for the next five years. You have an idle parcel of land available that cost $750,000.00 5 years ago; if the land were sold today it would net you $1,125,000 after-tax the land can be sold for $1,295,000 after tax in five years you will need to install 5.1 million in new manufacturing plant and equipment to actually produce the stamps this plant and equipment will be depreciated straight line to zero over the projects live your life the equipment can be sold for $450,000 at the end of the project you will also need $425,000 in initial networking capital for the project and an additional investment of $50,000 in every year there after your production costs are $.38 per stamp and you have dicks cost of $1.1 million per year if your tax rate is 23% and your required return on the project is 10% what bid price should you submit on the contract?
Solutions
Expert Solution
| Tax rate | 23% | ||||||
| Calculation of annual depreciation | |||||||
| Depreciation | Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | Total | |
| Cost | $ 5,100,000 | $ 5,100,000 | $ 5,100,000 | $ 5,100,000 | $ 5,100,000 | ||
| Dep Rate | 20.00% | 20.00% | 20.00% | 20.00% | 20.00% | ||
| Depreciation | Cost * Dep rate | $ 1,020,000 | $ 1,020,000 | $ 1,020,000 | $ 1,020,000 | $ 1,020,000 | $ 5,100,000 |
| Calculation of after-tax salvage value | |||||||
| Cost of machine | $ 5,100,000 | ||||||
| Depreciation | $ 5,100,000 | ||||||
| WDV | Cost less accumulated depreciation | $ - | |||||
| Sale price | $ 450,000 | ||||||
| Profit/(Loss) | Sale price less WDV | $ 450,000 | |||||
| Tax | Profit/(Loss)*tax rate | $ 103,500 | |||||
| Sale price after-tax | Sale price less tax | $ 346,500 | |||||
| Calculation of annual operating cash flow | |||||||
| Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | |||
| No of units | 100,000,000 | 100,000,000 | 100,000,000 | 100,000,000 | 100,000,000 | ||
| Selling price | $ - | $ - | $ - | $ - | $ - | ||
| Operating ost | $ 0.38 | $ 0.38 | $ 0.38 | $ 0.38 | $ 0.38 | ||
| Sale | $ - | $ - | $ - | $ - | $ - | ||
| Less: Operating Cost | $ 38,000,000 | $ 38,000,000 | $ 38,000,000 | $ 38,000,000 | $ 38,000,000 | ||
| Contribution | $ (38,000,000) | $ (38,000,000) | $ (38,000,000) | $ (38,000,000) | $ (38,000,000) | ||
| Less: Marketting cost | $ 1,100,000 | $ 1,100,000 | $ 1,100,000 | $ 1,100,000 | $ 1,100,000 | ||
| Less: Depreciation | $ 1,020,000 | $ 1,020,000 | $ 1,020,000 | $ 1,020,000 | $ 1,020,000 | ||
| Profit before tax (PBT) | $ (40,120,000) | $ (40,120,000) | $ (40,120,000) | $ (40,120,000) | $ (40,120,000) | ||
| Tax@23% | PBT*Tax rate | $ (9,227,600) | $ (9,227,600) | $ (9,227,600) | $ (9,227,600) | $ (9,227,600) | |
| Profit After Tax (PAT) | PBT - Tax | $ (30,892,400) | $ (30,892,400) | $ (30,892,400) | $ (30,892,400) | $ (30,892,400) | |
| Add Depreciation | PAT + Dep | $ 1,020,000 | $ 1,020,000 | $ 1,020,000 | $ 1,020,000 | $ 1,020,000 | |
| Cash Profit after-tax | $ (29,872,400) | $ (29,872,400) | $ (29,872,400) | $ (29,872,400) | $ (29,872,400) | ||
| Calculation of NPV | |||||||
| 10.00% | |||||||
| Year | Land | Capital | Working capital | Operating cash | Annual Cash flow | PV factor, 1/(1+r)^time | Present values |
| 0 | $ (1,125,000) | $ (5,100,000) | $ (425,000) | $ (6,650,000) | 1.0000 | $ (6,650,000) | |
| 1 | $ (50,000) | $ (29,872,400) | $ (29,922,400) | 0.9091 | $ (27,202,182) | ||
| 2 | $ (50,000) | $ (29,872,400) | $ (29,922,400) | 0.8264 | $ (24,729,256) | ||
| 3 | $ (50,000) | $ (29,872,400) | $ (29,922,400) | 0.7513 | $ (22,481,142) | ||
| 4 | $ (50,000) | $ (29,872,400) | $ (29,922,400) | 0.6830 | $ (20,437,402) | ||
| 5 | $ 1,295,000 | $ 346,500 | $ 625,000 | $ (29,872,400) | $ (27,605,900) | 0.6209 | $ (17,141,092) |
| Net Present Value | $(118,641,074) | ||||||
| Assume bid price per ticket | P | ||||||
| After tax value of bid price | 100000000*(1-23%)*P | ||||||
| After tax value of bid price | 77000000*P | ||||||
| Sum of PV factor | 3.7908 |
jeff jeffy answered 2 years ago