Question

Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today, it would give you $912,000 after taxes. Three years ago, you purchased some equipment for $60,000. This equipment has a current book value of $40,000 and a current market value of $30,000. The land and equipment can be used for this project. You will need to install $2,356,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project’s 5-year life. The equipment can be sold for $456,000 at the end of the project. You will also need $469,000 in initial net working capital for the project, and an additional investment of $38,000 in every year thereafter. All net working capital will be recovered when the project ends. Your production costs are 0.5 cents per stamp, and you have fixed costs of $608,000 per year. Your tax rate is 31 percent and your required return on this project is 11 percent. What bid price per stamp should you submit? Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today, it would give you $912,000 after taxes. Three years ago, you purchased some equipment for $60,000. This equipment has a current book value of $40,000 and a current market value of $30,000. The land and equipment can be used for this project. You will need to install $2,356,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project’s 5-year life. The equipment can be sold for $456,000 at the end of the project. You will also need $469,000 in initial net working capital for the project, and an additional investment of $38,000 in every year thereafter. All net working capital will be recovered when the project ends. Your production costs are 0.5 cents per stamp, and you have fixed costs of $608,000 per year. Your tax rate is 31 percent and your required return on this project is 11 percent. What bid price per stamp should you submit?

Answer 1

Tax rate		31%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Total
Cost		$      2,356,000	$      2,356,000	$      2,356,000	$      2,356,000	$      2,356,000
Dep Rate		20.00%	20.00%	20.00%	20.00%	20.00%
Depreciation	Cost * Dep rate	$         471,200	$         471,200	$         471,200	$         471,200	$         471,200	$      2,356,000
Calculation of after-tax salvage value		New equipment	Old equipment
Cost of machine			$      2,356,000
Depreciation			$      2,356,000
WDV	Cost less accumulated depreciation	$                   -	$           40,000
Sale price			$         456,000	$           30,000
Profit/(Loss)	Sale price less WDV	$         456,000	$         (10,000)
Tax	Profit/(Loss)*tax rate	$         141,360	$           (3,100)
Sale price after-tax	Sale price less tax		$         314,640	$           33,100
Initial investment in assets excluding working capital
Cost of Land	$            912,000
Cost of old equipment	$              33,100
New equipment	$         2,356,000
Total	$         3,301,100
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5
No of units		60,000,000	60,000,000	60,000,000	60,000,000	60,000,000
Selling price		$                   -	$                   -	$                   -	$                   -	$                   -
Operating ost		$               0.05	$               0.05	$               0.05	$               0.05	$               0.05
Sale		$                   -	$                   -	$                   -	$                   -	$                   -
Less: Operating Cost		$      3,000,000	$      3,000,000	$      3,000,000	$      3,000,000	$      3,000,000
Contribution		$    (3,000,000)	$    (3,000,000)	$    (3,000,000)	$    (3,000,000)	$    (3,000,000)
Less: Fixed cost		$         608,000	$         608,000	$         608,000	$         608,000	$         608,000
Less: Depreciation		$         471,200	$         471,200	$         471,200	$         471,200	$         471,200
Profit before tax (PBT)		$    (4,079,200)	$    (4,079,200)	$    (4,079,200)	$    (4,079,200)	$    (4,079,200)
Tax@31%	PBT*Tax rate	$    (1,264,552)	$    (1,264,552)	$    (1,264,552)	$    (1,264,552)	$    (1,264,552)
Profit After Tax (PAT)	PBT - Tax	$    (2,814,648)	$    (2,814,648)	$    (2,814,648)	$    (2,814,648)	$    (2,814,648)
Add Depreciation	PAT + Dep	$         471,200	$         471,200	$         471,200	$         471,200	$         471,200
Cash Profit after-tax		$    (2,343,448)	$    (2,343,448)	$    (2,343,448)	$    (2,343,448)	$    (2,343,448)
Calculation of NPV
						11.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0		$    (3,301,100)	$       (469,000)		$    (3,770,100)	1.0000	$     (3,770,100)
1			$         (38,000)	$    (2,343,448)	$    (2,381,448)	0.9009	$     (2,145,449)
2			$         (38,000)	$    (2,343,448)	$    (2,381,448)	0.8116	$     (1,932,837)
3			$         (38,000)	$    (2,343,448)	$    (2,381,448)	0.7312	$     (1,741,294)
4			$         (38,000)	$    (2,343,448)	$    (2,381,448)	0.6587	$     (1,568,734)
5		$         314,640	$         621,000	$    (2,343,448)	jeff jeffy Next > < Previous Related Solutions Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service... Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today, it would give you $912,000 after taxes. Three years ago, you purchased some equipment for $60,000. This equipment has a current book value of $40,000 and a current market value of $30,000. The land and equipment can be used... Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service... Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today, it would give you $912,000 after taxes. Three years ago, you purchased some equipment for $60,000. This equipment has a current book value of $40,000 and a current market value of $30,000. The land and equipment can be used... Consider a project to supply 98 million postage stamps per year to the U.S. Postal Service... Consider a project to supply 98 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,695,000 five years ago; if the land were sold today, it would net you $1,770,000 aftertax. The land can be sold for $1,746,000 after taxes in five years. You will need to install $5.25 million in new manufacturing plant and equipment to actually produce the stamps; this plant and... Consider a project to supply 98 million postage stamps per year to the U.S. Postal Service... Consider a project to supply 98 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,695,000 five years ago; if the land were sold today, it would net you $1,770,000 aftertax. The land can be sold for $1,746,000 after taxes in five years. You will need to install $5.25 million in new manufacturing plant and equipment to actually produce the stamps; this plant and... Consider a project to supply 90 million postage stamps per year to the U.S. Postal Service... Consider a project to supply 90 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,655,000 five years ago; if the land were sold today, it would net you $1,730,000 aftertax. The land can be sold for $1,738,000 after taxes in five years. You will need to install $4.85 million in new manufacturing plant and equipment to actually produce the stamps; this plant and... Consider a project to supply 92 million postage stamps per year to the U.S. Postal Service... Consider a project to supply 92 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,665,000 five years ago; if the land were sold today, it would net you $1,740,000 aftertax. The land can be sold for $1,740,000 after taxes in five years. You will need to install $4.95 million in new manufacturing plant and equipment to actually produce the stamps; this plant and... Consider a project to supply 102 million postage stamps per year to the U.S. Postal Service... Consider a project to supply 102 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,715,000 five years ago; if the land were sold today, it would net you $1,790,000 aftertax. The land can be sold for $1,750,000 after taxes in five years. You will need to install $5.45 million in new manufacturing plant and equipment to actually produce the stamps; this plant and... Consider a project to supply 104 million postage stamps per year to the U.S. Postal Service... Consider a project to supply 104 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,725,000 five years ago; if the land were sold today, it would net you $1,800,000 aftertax. The land can be sold for $1,752,000 after taxes in five years. You will need to install $5.55 million in new manufacturing plant and equipment to actually produce the stamps; this plant and... Consider a project to supply 97 million postage stamps per year to the U.S. Postal Service... Consider a project to supply 97 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,690,000 five years ago; if the land were sold today, it would net you $1,765,000 aftertax. The land can be sold for $1,745,000 after taxes in five years. You will need to install $5.2 million in new manufacturing plant and equipment to actually produce the stamps; this plant and... Consider a project to supply 105 million postage stamps per year to the U.S. Postal Service... Consider a project to supply 105 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,730,000 five years ago; if the land were sold today, it would net you $1,805,000 aftertax. The land can be sold for $1,753,000 after taxes in five years. You will need to install $5.6 million in new manufacturing plant and equipment to actually produce the stamps; this plant and... ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions 1- Briefly distinguish Primary data and secondary data? 2- Discuss the Marketing MEMO? In a responsibility accounting reporting system, as one moves up each level of responsibility in information.... It is often said that control is largely an illusion. For example, in traditional classrooms many... The molar enthalpy of a binary liquid system of species 1 and 2 at fixed T... JAVA I need to write a code that calculates mean and standard deviation using arrays and... This problem is based on the transactions for the Sweet Homes Company in your text. Prepare... Time value Personal Finance Problem You have ​$1,800 to invest today at 8​% interest compounded annually.... ADVERTISEMENT About @ 2020 WizEdu