Question

Heer Enterprises needs someone to supply it with 130,000 cartons of machine screws per year to support its manufacturing needs over the next four years, and you've decided to bid on the contract. It will cost you $765,000 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 four years, this equipment can be salvaged for $375,000. Your fixed production costs will be $190,000 per year, and your variable production costs should be $8.20 per carton. You also need an initial investment in net working capital of $59,500, all of which will be recovered when the project ends. Your tax rate is 22 percent and you require a return of 14.5 percent. What bid price per carton should you submit? (Please show work.)

A) $11.03

B) $12.04

C) $10.56

D) $11.37

E) $11.81

Answer 1