Question

Martin Enterprises needs someone to supply it with 115,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $770,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that, in five years, this equipment can be salvaged for $118,000. Your fixed production costs will be $385,000 per year, and your variable production costs should be $9.90 per carton. You also need an initial investment in net working capital of $65,000. If your tax rate is 21 percent and you require a return of 9 percent on your investment, what bid price should you submit? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Whats the bid price?

Answer 1

Total Vvariable cost annual (115000*9.90)				1138500
Total Annual fixed cost				385000
Total Annual cost				1523500
Lless: Tax benefit @ 21%				319935
After-tax cost				1203565
Less: tax shield on dep (770000/5*21%)				32340
Annual net cost				1171225
Annuity PVF at 9% for 5 yrs				3.88965
Present value of annual cost				4555655
Initial investment				770000
Investment in WC				65000
Total outflows				5390655
Less: Present value of release of WC				42245.52
(65000*0.649931)
Less: After ta salvage value				60586.57
(118000*79% *0.649931)
After tax cost				5287823
Divide: Annuity PVF at 9%				3.88965
Annual after tax revenue to be generated				1359460
Add: tax (1359460/79*21)				361375.4
Annual revenues to be generated				1720835
Divide: Number ofunits				115000
Bid price per unit				14.96	per unit