Question

Bebe Enterprise needs someone to supply it with 100,000 pcs of generators 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 $600,000 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 $500,000 per year, and your variable production costs should be $30 per pcs. You also need an initial investment in net working capital of $100,000. If your tax rate is 30% and you require a 12% return on your investment, what is our proper bid price per pcs?

(PLEASE ANSWER IT WITH GOOGLE DRIVE LINK (GOOGLE SHEET) )

ok no prob

Answer 1

Note: The minimum selling price was calculated by using Goal Seek Function in excel where Value of NPV was set to 0 by changing the selling price value
Also, the working capital that was invested earlier is recovered at the end of the project even though it is not mentioned in the question

Our minimum bid price or selling price = $36.96 i.e. at this price the NPV of the project is 0. Any price quoted above the minimum selling price will result in Positive NPV and hence the project will be accepted

Net Present Value = PV of Cash Inflow - PV of Cash Outflow
PV of Cash Inflow = Cash Inflow / (1 + Cost of Capital)n
PV of Cash Outflow = Purchase Price of Machine - Working Capital Invested