Question

Consider a project to supply 70 million postage stamps to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $279,000 five years ago; if the land were sold today, it would net you $130,000, aftertax. You estimate the land can be sold for $400,000 after taxes in five years. You will need to install $1,867,000 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 $950,000 at the end of the project. You will also need $32,000 in initial net working capital for the project, and an additional investment of $5,000 in every year thereafter. All net working capital will be recovered when the project ends. Your production costs are .21 cents per stamp, and you have fixed costs of $440,000 per year. Your tax rate is 35 percent and your required return on this project is 14 percent. What bid price per stamp should you submit?

Answer 1