Question

Bid Price - Consider a project to supply 100 million postage per year to the Postal Service for the next five years. You have an idle parcel of land available that cost $750,000 five years ago; if the land were sold today, it would net you $1,125,000 aftertax. The land can be sold for $1,295,000 after taxes in five years. You will need to install $5.1 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 $450,000 at the end of the project. You will also need $425,000 in initial net working capital for the project, and an additional investment of $50,000 in every year thereafter. Your production costs are .38 cents per stamp, and you have fixed costs of $1.1 million per year. If your tax rate is 23 percent and your required return on this project is 10 percent, what bid price should you submit on the contract?

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Answer 1