Question

Consider a project to supply 105 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,950,000 five years ago; if the land were sold today, it would net you $2,150,000 aftertax. The land can be sold for $2,350,000 after taxes in five years. You will need to install $5.45 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project’s five-year life. The equipment can be sold for $550,000 at the end of the project. You will also need $650,000 in initial net working capital for the project, and an additional investment of $55,000 in every year thereafter. Your production costs are 0.55 cents per stamp, and you have fixed costs of $1,090,000 per year. If your tax rate is 30 percent and your required return on this project is 10 percent, what bid price should you submit on the contract?

Answer 1