Question

Guthrie Enterprises needs someone to supply it with 149,000 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 $1,890,000 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 $159,000. Your fixed production costs will be $274,000 per year, and your variable production costs should be $9.40 per carton. You also need an initial investment in net working capital of $139,000. If your tax rate is 35 percent and you require a return of 10 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 (149000*9.40)			1400600
Fixed cost			274000
Total cost			1674600
Tax @ 35%			586110
tax shield on dep			132300
(1890000/5*35%)
Net Annual cost			956190
Multiply: Annuity PVF at 10%			3.79079
Present value of cost				3624715
Initial investment				1890000
Investment in WC				139000
Total cost				5653715
Less: Salvage value				64172.19
(159000-35%)*0.620921
Less: Release of WC				86308.02
(139000*0.620921)
Net Cosst of 5 years				5503235
Divide: Annuity factor				3.79079
Annualised cost				1451738
Add: Taax (1451738/65*35)				781705.3
Total revenue to be genrated per year				2233444
Divide: Uunits				149000
Bid price				14.99
Answer is $ 14.99