Question

Consider a project to supply 10 million sandbags per year to the Army Corps of Engineers for the next four years. You have an idle manufacturing plant available that cost $1 million five years ago; if the plant was scrapped today, it would net you $100,000. You will need to install $1.8 million in new manufacturing equipment to actually produce the sandbags; this equipment will be depreciated straight-line to zero over its four-year life. The equipment can be sold for $200,000 at the end of the project. You will also need $200,000 in initial net working capital for the project, and an additional investment of $50,000 in every year thereafter. Your production costs are 20 cents per sandbag and you have fixed costs of $300,000 per year. If your tax rate is 34 percent and your required return on this project is 14 percent, what bid price will you submit on the contract?

Answer 1