Question
In: Finance
ABC Inc. needs 150,000 boxes of parts per year over the next four years, and you...
ABC Inc. needs 150,000 boxes of parts per year over the next four years, and you are deciding on a bid for the contract. The capital equipment will cost $950,000 to install, which will be depreciated straight-line to zero over the life of the project. The equipment can be sold for $250,000 in four years. The equipment will be installed on land the company already owns. The land can be sold for $750,000 after-tax today. The land is expected to net $850,000 after taxes in 4 years. The fixed production costs are $225,000 per year, and the variable costs are $10.0 for each box. An initial investment in net working capital of $65,000 will be required. An additional $5,000 in networking capital will be required in years 1, 2, and 3. All of the networking capital investment will be recovered at the end of the project. The tax rate is 21 percent and you require a return of 15 percent. What bid price per box should you submit?
Solutions
Expert Solution
| Tax rate | 21% | ||||||
| Calculation of annual depreciation | |||||||
| Depreciation | Year-1 | Year-2 | Year-3 | Year-4 | Total | ||
| Cost | $ 950,000 | $ 950,000 | $ 950,000 | $ 950,000 | |||
| Dep Rate | 25.00% | 25.00% | 25.00% | 25.00% | |||
| Depreciation | Cost * Dep rate | $ 237,500 | $ 237,500 | $ 237,500 | $ 237,500 | $ 950,000 | |
| Calculation of after-tax salvage value | |||||||
| Cost of machine | $ 950,000 | ||||||
| Depreciation | $ 950,000 | ||||||
| WDV | Cost less accumulated depreciation | $ - | |||||
| Sale price | $ 250,000 | ||||||
| Profit/(Loss) | Sale price less WDV | $ 250,000 | |||||
| Tax | Profit/(Loss)*tax rate | $ 52,500 | |||||
| Sale price after-tax | Sale price less tax | $ 197,500 | |||||
| Calculation of annual operating cash flow | |||||||
| Year-1 | Year-2 | Year-3 | Year-4 | ||||
| No of units | 150,000 | 150,000 | 150,000 | 150,000 | |||
| Selling price | $ - | $ - | $ - | $ - | |||
| Operating ost | $ 10 | $ 10 | $ 10 | $ 10 | |||
| Sale | $ - | $ - | $ - | $ - | |||
| Less: Operating Cost | $ 1,500,000 | $ 1,500,000 | $ 1,500,000 | $ 1,500,000 | |||
| Contribution | $ (1,500,000) | $ (1,500,000) | $ (1,500,000) | $ (1,500,000) | |||
| Less: Fixed cost | $ 225,000 | $ 225,000 | $ 225,000 | $ 225,000 | |||
| Less: Depreciation | $ 237,500 | $ 237,500 | $ 237,500 | $ 237,500 | |||
| Profit before tax (PBT) | $ (1,962,500) | $ (1,962,500) | $ (1,962,500) | $ (1,962,500) | |||
| Tax@21% | PBT*Tax rate | $ (412,125) | $ (412,125) | $ (412,125) | $ (412,125) | ||
| Profit After Tax (PAT) | PBT - Tax | $ (1,550,375) | $ (1,550,375) | $ (1,550,375) | $ (1,550,375) | ||
| Add Depreciation | PAT + Dep | $ 237,500 | $ 237,500 | $ 237,500 | $ 237,500 | ||
| Cash Profit after-tax | $ (1,312,875) | $ (1,312,875) | $ (1,312,875) | $ (1,312,875) | |||
| Calculation of NPV | |||||||
| 15.00% | |||||||
| Year | Land | Capital | Working capital | Operating cash | Annual Cash flow | PV factor, 1/(1+r)^time | Present values |
| 0 | $ (750,000) | $ (950,000) | $ (65,000) | $ (1,765,000) | 1.0000 | $ (1,765,000) | |
| 1 | $ (5,000) | $ (1,312,875) | $ (1,317,875) | 0.8696 | $ (1,145,978) | ||
| 2 | $ (5,000) | $ (1,312,875) | $ (1,317,875) | 0.7561 | $ (996,503) | ||
| 3 | $ (5,000) | $ (1,312,875) | $ (1,317,875) | 0.6575 | $ (866,524) | ||
| 4 | $ 850,000 | $ 197,500 | $ 80,000 | $ (1,312,875) | $ (185,375) | 0.5718 | $ (105,989) |
| Net Present Value | $ (4,879,994) | ||||||
| PV of revenue | |||||||
| Assumed bid price for each | P | ||||||
| Annual revenue after tax | 150000*P*(1-21%) | ||||||
| Sum of PV factor for Year 1-4 | 2.8550 | ||||||
| PV of total revenue | 150000*P*(1-21%)*2.8550 | ||||||
| PV of total revenue | 338314.935981504*P | ||||||
| 338314.935981504*P | $ 4,879,994 | ||||||
| Bid price = | $ 14.42 |
 jeff jeffy answered 1 year agoRelated SolutionsABC Inc. needs 150,000 boxes of parts per year over the next four years, and you...ABC Inc. needs 150,000 boxes of parts per year over the next
four years, and you are deciding on a bid for the contract. The
capital equipment will cost $950,000 to install, which will be
depreciated straight-line to zero over the life of the project. The
equipment can be sold for $250,000 in four years. The equipment
will be installed on land the company already owns. The land can be
sold for $750,000 after-tax today. The land is expected to...
22) ABC Inc. needs 150,000 boxes of parts per year over the next four years, and...22) ABC Inc. needs 150,000 boxes of parts per year over the next
four years, and you are deciding on a bid for the contract. The
capital equipment will cost $950,000 to install, whichwill be
depreciated straight-line to zero over the life of the project. The
equipment can be sold for $250,000 in four years. The fixed
production costs are $225,000 per year, and the variable costs are
$10.0for each box. An initial investment in net working capital of
$65,000...
ABC Corporation needs to purchase 225,000 boxes of needles per year to support its manufacturing operation over the next 7 years.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...
Earnings per common share of ABC Industries for the next year are expected to be $2.25 and to grow 7.5% per year over the next 4 years.Earnings per common share of ABC Industries for the
next year are expected to be $2.25 and to grow 7.5% per year over
the next 4 years. At the end of the 5 years, earnings growth rate
is expected to fall to 6.25% and continue at that rate for the
foreseeable future. ABC’s dividend payout ratio is 40%. If the
expected return on ABC's common shares is 18.5%, calculate the
current share price. (Round your answer to the nearest
cent.)Current...
Dr.Arrowhead will receive $150,000 per year for the next 20 years as an ordinary annuity payment...
Dr.Arrowhead will receive $150,000 per year for the next 20 years
as an ordinary annuity payment for a high-tech slingshot weapon he
invented. If a 6 percent rate is applied, should he be willing to
sell out his future rights now for $2,000,000?
Branson, Inc. has made a commitment to pay the following dividends over the next four years:...Branson, Inc. has made a commitment to pay the following
dividends over the next four years: $7, $13, $18, and $3.25. At the
end of this four year period, the firn has further commited to grow
the dividend indefinitiely at a constant 5 percent growth rate. If
you require a return on this stock of 8.4 percent, what is the
current share price? (Do not round intermediate calculations and
round your answer to 2 decimal places, e.g., 32.16.)
A proposed project will generate £150,000 in revenue a year for 20 years (starting next year),...A proposed project will generate £150,000 in revenue a year for
20 years (starting next year), but will cause another product line
to lose £60,000 in revenue a year during that time. The project
will make use of 50% of an already leased warehouse with total
annual rent of£50,000 (the contract does not prohibit sub-leasing).
The discount rate for this project is 6%. Should the firm undertake
this project if the required investment is £250,000? What is the
Payback Period...
Moe's building costs $800,000 and it is expected to make $150,000 per year for the next...Moe's building costs $800,000 and it is expected to make
$150,000 per year for the next 6 years. Given a required rate of
return of 12% and maximum required payback period of 4 years,
calculate the Payback Period and Discounted Payback Period for this
big project and explain whether or not the big project should be
accepted under each of those two methods.
You expect ABC Corporation to generate the following free cash flows over the next five years:...You expect ABC Corporation to generate the following free cash
flows over the next five years:
Year
1
2
3
4
5
FCF ($ millions)
75
84
96
111
120
Beginning with year
six, you estimate that ABC's free cash flows will grow at 6% per
year and that ABC's weighted average cost of capital is 15%.
If ABC has $500 million of debt, $50 million of cash, and 14
million shares of stock outstanding, then what is the price...
You forecast a company's dividends for the next four years. In Year 1, you expect to...You forecast a company's dividends for the next four
years. In Year 1, you expect to receive $1.00 in dividends. In Year
2, you expect to receive $1.10 in dividends. In Year 3, you expect
to receive $1.20 in dividends. In Year 4, you expect to receive
$1.30. After Year 4, dividends are expected to grow at 2%. The
rate of return for similar risk common stock is 7%. What is the
current value of this company's stock?
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
ADVERTISEMENT
|