Question

Alson Enterprises needs someone to supply it with 185,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid for the contract. It will cost you R940,000 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 five years, this equipment can be salvaged for R70,000. Your fixed production costs will be R305,000 per year, and your variable production costs should be R9.25 per carton. You also need an initial investment in net working capital of R75,000. If your tax rate is 23 per cent and you require a 12 per cent return on your investment, what bid price should you submit? Show in Excel.

Answer 1

Answer as below.

Return on Investment is 12%

Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
Total Units (1)	185000	185000	185000	185000	185000
Variable Cost Per Unit (2)	9.25	9.25	9.25	9.25	9.25
Total Variable Cost (3) = (1) *(2)	1711250	1711250	1711250	1711250	1711250
Total Foxed Cost(4)	305000	305000	305000	305000	305000
Total Production Cost (5)=(3)+(4)	2016250	2016250	2016250	2016250	2016250
Depreciation(6)=940000/5=188000	188000	188000	188000	188000	188000
Salavage Value(7)					-70000
Total Cost(8)=(5)+(6)+(7)	2204250	2204250	2204250	2204250	2134250
Tax rate(9)=(8)*0.23	506977.5	506977.5	506977.5	506977.5	490877.5
Cost after Tax Reduction(10)=(8)-(9)	1697273	1697273	1697273	1697273	1643373
Total Cost on Present Value (11)-Total of 10	8432462.5
Initial Investment (12) Year 0	75000
Investment in machinery (13)	940000
Return on Investment (14)	12%
Return on investment in Value(15)=(13)*(14)	112800
Total Sales Price (16)=(11)+(12)+(15)	8620262.5
Sales Price/Bid Price(16)=(16)/185000*5	15.5320045

Initial Investment is Present day value.

Bid Price is $15.53