Another utilization of cash flow analysis is setting the bid price on a project.

Question

Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price represents a financial break-even level for the project. Guthrie Enterprises needs someone to supply it with 156,000 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 $1,960,000 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 $166,000. Your fixed production costs will be $281,000 per year, and your variable production costs should be $10.10 per carton. You also need an initial investment in net working capital of $146,000. The tax rate is 35 percent and you require a 10 percent return on your investment. Assume that the price per carton is $17.60.

  

Calculate the project NPV. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  

  

What is the minimum number of cartons per year that can be supplied and still break even? (Do not round intermediate calculations and round your answer to the nearest whole number. (e.g., 32))

  

  

What is the highest fixed costs that could be incurred and still break even? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  

Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price represents a financial break-even level for the project. Guthrie Enterprises needs someone to supply it with 156,000 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 $1,960,000 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 $166,000. Your fixed production costs will be $281,000 per year, and your variable production costs should be $10.10 per carton. You also need an initial investment in net working capital of $146,000. The tax rate is 35 percent and you require a 10 percent return on your investment. Assume that the price per carton is $17.60.

Explanation / Answer

Answer:

b) Minimum no of cartoon to be supplied to break even =

Initial inflows/Price per cartoon =

= 119,659 nos

c) Fixed cost per year that can be incurred and still break even = current fixed cost + NPV/project years = $281,000+ $762,254/5 = $433,450.8 (ans)

Initial cashflow = In $ Cost of machinery 1960000 Working capital Investment 146000 2106000 Oprating cash flow: Sales (156,000*$17.6) 2745600 Operating Expense: Variable cost (156,000*10.1) 1575600 Fixed cost 281000 Depreciation ($1,960,000/5) 392000 Total 2248600 Operating Profit: 497000 Less: Tax (497000*35%) 173950 Profit after Tax 323050 Add: Depreciation 392000 Operating Cash flow 715050 Terminal Flow: Salvage value = 166000 Less: Bool Value 0 Profit 166000 Less: Tax 58100 Cash flow after tax 107900 Add: Recovery of working capital 146000 Total terminal flow 253900

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