Question

Consider a project to supply 100 million postage stamps per year to the USPS for the next five

years. To pursue the project, you will need to install $4.1 million in new manufacturing plant

and equipment. This will be depreciated straight-line to zero over the project’s five years. The

equipment can be sold for $540,000 at the end of the project. You will also need $600,000 in

initial net working capital for the project and an additional investment of $50,000 in every year

thereafter. All net working capital will be recouped at the end of the project. Your production

costs are $.005 per stamp and you have fixed costs of $950,000 per year. If your tax rate is 34%

and your required return is 12%, what bid price should you submit on the contract?

Answer 1

Tax rate		34%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Total
Cost		$         4,100,000	$         4,100,000	$         4,100,000	$         4,100,000	$         4,100,000
Dep Rate (1/5=20%)		20.00%	20.00%	20.00%	20.00%	20.00%
Depreciation	Cost * Dep rate	$            820,000	$            820,000	$            820,000	$            820,000	$            820,000	$        4,100,000
Calculation of after-tax salvage value
Cost of machine			$         4,100,000
Depreciation			$         4,100,000
WDV	Cost less accumulated depreciation	$                       -
Sale price			$            540,000
Profit/(Loss)	Sale price less WDV		$            540,000
Tax	Profit/(Loss)*tax rate	$            183,600
Sale price after-tax	Sale price less tax		$            356,400
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5
No of units		100,000,000	100,000,000	100,000,000	100,000,000	100,000,000
Selling price		$                       -	$                       -	$                       -	$                       -	$                       -
Operating ost		$                 0.005	$                0.005	$                0.005	$                0.005	$                0.005
Sale		$                       -	$                       -	$                       -	$                       -	$                       -
Less: Operating Cost		$            500,000	$            500,000	$            500,000	$            500,000	$            500,000
Contribution		$          (500,000)	$          (500,000)	$          (500,000)	$          (500,000)	$          (500,000)
Less: Fixed cost		$            950,000	$            950,000	$            950,000	$            950,000	$            950,000
Less: Depreciation		$            820,000	$            820,000	$            820,000	$            820,000	$            820,000
Profit before tax (PBT)		$       (2,270,000)	$      (2,270,000)	$      (2,270,000)	$      (2,270,000)	$      (2,270,000)
Tax@34%	PBT*Tax rate	$           (771,800)	$           (771,800)	$           (771,800)	$           (771,800)	$           (771,800)
Profit After Tax (PAT)	PBT - Tax	$       (1,498,200)	$      (1,498,200)	$      (1,498,200)	$      (1,498,200)	$      (1,498,200)
Add Depreciation	PAT + Dep	$            820,000	$            820,000	$            820,000	$            820,000	$            820,000
Cash Profit after-tax		$          (678,200)	$          (678,200)	$          (678,200)	$          (678,200)	$          (678,200)
Calculation of NPV
						12.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0		$        (4,100,000)	$           (600,000)		$       (4,700,000)	1.0000	$      (4,700,000)
1			$             (50,000)	$           (678,200)	$           (728,200)	0.8929	$          (650,179)
2			$             (50,000)	$           (678,200)	$           (728,200)	0.7972	$          (580,517)
3			$             (50,000)	$           (678,200)	$           (728,200)	0.7118	$          (518,318)
4			$             (50,000)	$           (678,200)	$           (728,200)	0.6355	$          (462,784)
5		$            356,400	$            800,000	$           (678,200)	$            478,200	0.5674	$           271,344
					Net Present Value	$     (6,640,454)
So the present value of after tax revenue for 5 years should be $ 6,640,454				jeff jeffy Next > < Previous Related Solutions Consider a project to supply 100 million postage stamps per year to the USPS for the... Consider a project to supply 100 million postage stamps per year to the USPS for the next five years. To pursue the project, you will need to install $4.1 million in new manufacturing plant and equipment. This will be depreciated straight-line to zero over the project’s five years. The equipment can be sold for $540,000 at the end of the project. You will also need $600,000 in initial net working capital for the project and an additional investment of $50,000... Consider a project to supply 100 million postage stamps per year to the USPS for the... Consider a project to supply 100 million postage stamps per year to the USPS for the next five years. To pursue the project, you will need to install $4.1 million in new manufacturing plant and equipment. 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