Question

Problem 8-34 Calculating a Bid Price

Your company has been approached to bid on a contract to sell 3,900 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.5 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $92,000 to be returned at the end of the project and the equipment can be sold for $272,000 at the end of production. Fixed costs are $637,000 per year, and variable costs are $152 per unit. In addition to the contract, you feel your company can sell 9,200, 10,100, 12,200, and 9,500 additional units to companies in other countries over the next four years, respectively, at a price of $295. This price is fixed. The tax rate is 30 percent, and the required return is 11 percent. Additionally, the president of the company will only undertake the project if it has an NPV of $100,000. What bid price should you set for the contract? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
   
Bid price           $

Answer 1

Based on the given data, pls find below workings:

- Since the Other revenue with selling Price and Fixed costs are exclusive from this bidding related contract benefits or costs, both of those have not been considered in the below workings; Precisely, the variables which directly impact the bid price have been considered.

- Initially, the workings have been made using Bid Price as $ 1; Once the NPV is generated, using DATA TABLE option (in Excel), have done multiple iterations to estimate Bid Range, which can generate NPV of $ 100000

- Initial iteration from $ 100 to $ 500: This led to the understanding that the Bid Price should be between $ 400 to $ 500

- Second iteration from $ 450 to $500: This led to the undestanding that the bid price should be nearer and in between $ 470 and $ 480 (more nearer to $ 470);

- Then, have applied Goal seek option to identify the exact BID Price to have NPV of $ 100000; This GOAL SEEK option could be applied even at first as well (before scenario analysis); However, the scenario analysis helps in establishing the range and overall variation in Bid Price versus NPV:

The Bid Price should be $472