Question

# Farah’s Fabulous Fashions (FFF) frequently fabricates fine footwear for famous foreign furriers. However, in her unusually...

Farah’s Fabulous Fashions (FFF) frequently fabricates fine footwear for famous foreign furriers. However, in her unusually flamboyant style, Farah has decided to bid on a contract to supply the military boots for female soldiers. The contract calls for supplying the military with 100,000 pairs of boots per year over the 5-year life of the project. After spending \$250,000 on a feasibility study, Farah believes one of her existing factories can produce the boots after modifying the plant at a cost of \$2,600,000. The new plant and equipment will be depreciated to zero over the 5-year life of the project and will have no salvage value. The boots have a variable cost of \$44 per pair. Farah’s fixed costs are \$900,000 per year. Farah also expects she will be able to sell an additional 25,000 pair of the army boots for \$180 per pair to college coeds wanting that military look. Farah’s discount rate is 14% and her tax rate is 40%. What is the minimum price per pair of boots that Farah should bid on the project?

Present Value of profits for 5 years should be intial costs of plant, equipment and feasibilty study =  \$2,850,000

Using Goal Seek in Excel for reverse engineering to find equal PROFIT flows in each of the 5 years we find that Annual Profit After Tax = ~\$830,158

Profit Before Tax = ~1,383,596

Total Costs = 900,000 + 44*125000 = 6,400,000

Total Revenue should be 1,383,596 + 6,400,000 = 7,783,596

Above revenue includes amount from sales to college coeds = 25000*180 = 4,500,000

Hence, minimum bid should be (7,783,596-4,500,000)/100,000 = \$33 per pair (> 32.83596667)