Question

Smith Enterprise needs someone to supply it with 125,000 cartons of machine screws per year to support its manufacturing needs over the next 5 years, and you've decided to bid on the contract. It will cost you $720,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that in 5 years, this equipment can be salvaged for $50,000 (before tax). Your fixed production costs will be $285,000 per year, and your variable production costs should be $10.5 per carton. You also need an initial investment in net working capital of $70,000. If your tax rate is 30 percent and you require a 12 percent return on your investment, what is our proper bid price per carton?

Answer 1