Question

In: Finance

our company has been approached to bid on a contract to sell 5,250 voice recognition (VR)...

our company has been approached to bid on a contract to sell 5,250 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $440,000 to be returned at the end of the project, and the equipment can be sold for $395,000 at the end of production. Fixed costs are $615,000 per year, and variable costs are $84 per unit. In addition to the contract, you feel your company can sell 13,200, 15,300, 18,800, and 11,300 additional units to companies in other countries over the next four years, respectively, at a price of $188. This price is fixed. The tax rate is 24 percent, and the required return is 9 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $150,000. What bid price should you set for the contract? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Solutions

Expert Solution

VR 0 1 2 3 4
Unit Sales 13,200 15,300 18,800 11,300
Investment -$4,000,000
NWC -$440,000 $440,000
Salvage $395,000
Sales $3,347,903 $3,742,703 $4,400,703 $2,990,703
VC -$1,549,800 -$1,726,200 -$2,020,200 -$1,390,200
FC -$615,000 -$615,000 -$615,000 -$615,000
Depreciation -$1,000,000 -$1,000,000 -$1,000,000 -$1,000,000
EBT $183,103 $401,503 $765,503 -$14,498
Tax (24%) -$43,945 -$96,361 -$183,721 $3,479
Net Profit $139,158 $305,142 $581,782 -$11,018
Cash Flows -$4,440,000 $1,139,158 $1,305,142 $1,581,782 $1,729,182
NPV $150,032.72

We need to find bid price such that NPV = $150,000

Sales in year 1 = 13,200 x 188 + 5,250 x bid price

VC = (13,200 + 5,250) x 84 = 1,549,800

Depreciation = 4,000,000 / 4 = 1,000,000

Cash Flows = Investment + NWC + Salvage x (1 - tax) + Net Profit + Depreciation

NPV can be calculated using the same function in excel or calculator with 9% discount rate.

Using trial and error method, we get when bid price = $165.01, NPV = $150,000.


Related Solutions

Your company has been approached to bid on a contract to sell 5,050 voice recognition (VR)...
Your company has been approached to bid on a contract to sell 5,050 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.6 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $420,000 to be returned at the end...
Your company has been approached to bid on a contract to sell 5,700 voice recognition (VR)...
Your company has been approached to bid on a contract to sell 5,700 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.9 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $485,000 to be returned at the end...
Your company has been approached to bid on a contract to sell 3,600 voice recognition (VR)...
Your company has been approached to bid on a contract to sell 3,600 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.2 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $89,000 to be returned at the end...
Your company has been approached to bid on a contract to sell 5,250 voice recognition (VR)...
Your company has been approached to bid on a contract to sell 5,250 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $440,000 to be returned at the end...
Your company has been approached to bid on a contract to sell 4,700 voice recognition (VR)...
Your company has been approached to bid on a contract to sell 4,700 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.3 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $100,000 to be returned at the end...
Your company has been approached to bid on a contract to sell 4,300 voice recognition (VR)...
Your company has been approached to bid on a contract to sell 4,300 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.9 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $96,000 to be returned at the end...
Your company has been approached to bid on a contract to sell 5,450 voice recognition (VR)...
Your company has been approached to bid on a contract to sell 5,450 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.4 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $460,000 to be returned at the end...
Your company has been approached to bid on a contract to sell 4,300 voice recognition (VR)...
Your company has been approached to bid on a contract to sell 4,300 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.9 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $96,000 to be returned at the end...
Your company has been approached to bid on a contract to sell 3,700 voice recognition (VR)...
Your company has been approached to bid on a contract to sell 3,700 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.3 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $90,000 to be returned at the end...
Your company has been approached to bid on a contract to sell 5,000 voice recognition (VR)...
Your company has been approached to bid on a contract to sell 5,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.6 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $103,000 to be returned at the end...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT