Question

Sharma & Anil Railcar Limited is considering bidding on a contract to supply 10 subway cars each year to the City of Montreal for the next 15 years. Use the following information to determine the bid price per subway car.

1. To build these cars the company has to upgrade the existing plant and equipment. Existing P& E has a current market value of $5,000,000 and an expected salvage value of $1,000,000 after 10 years. Upgrade will cost $10,000,000 and after 15 years P & E could be salvaged for $2,000,000.

2. If the company decided to build the subway cars then it will lose $1,200,000 per year of after tax operating income over a 10 year period from the current operations.

3. Labour and material cost is estimated to be $400,000 per subway car and the fixed cost $3,000,000 per year.

4. Subway car project will require an addition to net working capital of $3,000,000, which will be fully recovered after 15 years.5.CCA rate is 25%, tax rate is 40% and the appropriate discount rate is 12%.

Determine the bid price per subway car. What is the bid price per subway car?

Answer 1

		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate 12%=0.12
		N=Year of Cash Flow
		CASH FLOWS FOR THE PROJECT
	N	Year	0	1	2	3	4	5	6
	A	Upgrading Cost	($10,000,000)
	B	Market Value of old equipment	($5,000,000)
	C=A-B	Incremental Cash Flow for the project	($5,000,000)
		Depreciation tax shield
	D	Book value at beginning of year		$10,000,000	$7,500,000	$5,625,000	$4,218,750	$3,164,063	$2,373,047
	E=D*25%	Depreciation for the year		$2,500,000	$1,875,000	$1,406,250	$1,054,688	$791,016	$593,262
	F=D-E	Book value at end of year		$7,500,000	$5,625,000	$4,218,750	$3,164,063	$2,373,047	$1,779,785
	G=E*40%	Depreciation tax shield		$1,000,000	$750,000	$562,500	$421,875	$316,406	$237,305
	H	Salvage value in year 15
	I=H-F	Gain on Salvage
	J=I*40%	Tax on Gain
	K=H-J	After tax terminal cash flow on salvage
	L	Loss on income from current operation		($1,200,000)	($1,200,000)	($1,200,000)	($1,200,000)	($1,200,000)	($1,200,000)
	M	Cost of labor and materials per year		($4,000,000)	($4,000,000)	($4,000,000)	($4,000,000)	($4,000,000)	($4,000,000)
	P	Fixed Cost per year		($3,000,000)	($3,000,000)	($3,000,000)	($3,000,000)	($3,000,000)	($3,000,000)
	Q	Cash flow due Net Working Capital	($3,000,000)
	R=C+G+K+L+M+P+Q	Net Cash Flow for the project	($8,000,000)	($7,200,000)	($7,450,000)	($7,637,500)	($7,778,125)	($7,883,594)	($7,962,695)
	PV=R/(1.12^N)		($8,000,000)	-$6,428,571	-$5,939,094	-$5,436,222	-$4,943,139	-$4,473,363	-$4,034,149
	PW	Present Worth of Costs of 10 Cars	($59,305,098)
	X=PW/10	Minimum Bid Price for each Car	$5,930,510
	Note:	Due to restriction of number of characters uploading
		Calculation of year 7 to15 uploaded as image