Question

JuJu Enterprises needs someone to supply it with 100,000 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 $840,000 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 sold for $55,000. Your fixed production costs will be $435,000 per year, and your variable production costs should be $15.10 per carton. You also need an initial investment in net working capital of $75,000. If your tax rate is 35 percent and you require a return of 14 percent on your investment, what bid price should you submit?

Answer 1

Annual cost
variable cost		(100000*15.10)		1510000
Add: Fixed cost				435000
Total annual cost				1945000
Less: Tax saving @ 35%				680750
Net tax cost				1264250
Less: tax shield on dep (840000/5*35%)				58800
Net Annual cost after dep benefit				1205450
Multiply: Annuity PVF at 5Yrs at 14%				3.43308
Present value of annual cost					4138406
Initail Investmenet					840000
Investment in WC					75000
Total Outflows					5053406
Less: Present value of after tax salvage					9998
	(55000-35%)*0.519369
Net Cash outflows					5043408
Divide: Annuity PVF at 14% for 5 yrs					3.43308
Annual revnue after tax					1469062
Add: tax @ 35% (1469062/65*35)					791033.5
Pretax revenue annual					2260096
Divide: Units					100000
Bid price					22.6
Answer is 22.60