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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?

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Expert Solution

Particular Year 0 Year 1 TO 3 year 4
Sale 150,000 150,000
Bid Price x x
Revenue 150,000x 150,000x
Less:
Fixed Cost 225,000 225,000
Variable cost 1,500,000 1,500,000
Depreciation 237500 237500
Total Cost 1,962,500 1,962,500
EBIT 150,000x -1,962500 150,000x -1,962500
Net Income (150,000x -1,962500)*.79 (150,000x -1,962500)*.79
Add
Depreciation 237500 237500
Salvage Value 197500
Recovery capital 80,000
Less:
Capital Expenditure 950,000
inc in working capital 65000 5000
Net cash flow -1,015,000 (150,000x -1,962500)*.79+232500 (150,000x -1,962500)*.79+515000

NPV of the project = -PV OF CASH OUTFLOW + PV OF CASH IN FLOW

0=-1015,000+ [PVIF A(15%,3 year) * [(150000X - 1962500)*.79] +232500] + [PVIF (15%,4 year) * [(150000X - 1962500)*.79] +515000]
1015000= [2.2832] * [118500X - 1550375 + 232500] + [0.683] * [118500X -1550375 +515000]
1015000= 2.2832 * [118500X - 1317875] + 0.5718 [118500X -1035375]
1015000= 270559.20X - 3008972.2 + 67758.30X - 592027.43
1015000= 338317.50X - 3601000
1015000+ 3601000= 338317.50X
4616000= 338317.50X
X = 4616000/338317.50
X =13.64

Bid price should be 13.64

jeff jeffy answered 1 year ago
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