Question

Consider a project to supply 107 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,740,000 five years ago; if the land were sold today, it would net you $1,815,000 aftertax. The land can be sold for $1,755,000 after taxes in five years. You will need to install $5.7 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 $730,000 at the end of the project. You will also need $610,000 in initial net working capital for the project, and an additional investment of $57,000 in every year thereafter. Your production costs are .55 cents per stamp, and you have fixed costs of $1,120,000 per year. If your tax rate is 23 percent and your required return on this project is 9 percent, what bid price should you submit on the contract? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.)

Answer 1