Question

Guthrie Enterprises needs someone to supply it with 144,000 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 $1,840,000 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 salvaged for $154,000. Your fixed production costs will be $269,000 per year, and your variable production costs should be $8.90 per carton. You also need an initial investment in net working capital of $134,000. If your tax rate is 39 percent and you require a return of 12 percent on your investment, what bid price per carton should you submit? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  

Answer 1

Annual after tax cost:
variable cost (144000*8.90)			1281600
Fixed cost			269000
Total cost			1550600
Tax @ 39%			604734
tax shield on dep			143520
(1840000/5*0.39)
Net Annual cost			802346
Multiply: Annuity PVF at 12%			3.60478
Present value of cost				2892281
Initial investment				1840000
Investment in WC				134000
Total cost				4866281
Less: Salvage value				53304.09
(154000-39%)*0.567427
Less: Release of WC				76035.22
(134000*0.567427)
Net Cosst of 5 years				4736942
Divide: Annuity factor				3.60478
Annualised cost				1314072
Add: Taax (1314072/61*39)				840144.6
Total revenue to be genrated per year				2154217
Divide: Uunits				144000
Bid price				14.95984
Answer is 14.96