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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 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?

Please show the calculations. Thank you in advance :)

Solutions

Expert Solution

NPV of the project = PV of Net Inflows - PV of Outflows
The minimum bid price of the box should be such that NPV = 0 i.e PV of Net Inflows = PV of Outflows


= [PVAF (15%,3) * [(150000X - 1962500)*.79] +232500] + [PVIF (15%,4) * [(150000X - 1962500)*.79] +515000] = 1015000
= [0.9091+0.8264+0.7513] * [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
= 338317.50X = 1015000 + 3601000
= 338317.50X = 4616000
= X = 4616000/338317.50
= X =13.644

The minimum bid price of the box should be 13.644

Note : Post Tax Salvage Value has been calculated by multiplying Salvage Value * (1-Tax Rate), since Book value was 0.

jeff jeffy answered 1 year ago
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