Consider a project to supply 106 million postage stamps per year to the U.S. Pos

Question

Consider a project to supply 106 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,960,000 five years ago; if the land were sold today, it would net you $2,160,000 aftertax. The land can be sold for $2,360,000 after taxes in five years. You will need to install $5.46 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project’s five-year life. The equipment can be sold for $560,000 at the end of the project. You will also need $660,000 in initial net working capital for the project, and an additional investment of $56,000 in every year thereafter. Your production costs are .56 cents per stamp, and you have fixed costs of $1,080,000 per year. If your tax rate is 34 percent and your required return on this project is 12 percent, what bid price should you submit on the contract?

Consider a project to supply 106 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,960,000 five years ago; if the land were sold today, it would net you $2,160,000 aftertax. The land can be sold for $2,360,000 after taxes in five years. You will need to install $5.46 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's five-year life. The equipment can be sold for $560,000 at the end of the project. You will also need $660,000 in initial net working capital for the project, and an additional investment of $56,000 in every year thereafter. Your production costs are .56 cents per stamp, and you have fixed costs of $1,080,000 per year. If your tax rate is 34 percent and your required return on this project is 12 percent, what bid price should you submit on the contract? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161) Ridnrice

Explanation / Answer

Postage stamps                    106 million Land        1,960,000 sunk cost, ignore todays sale price        2,160,000 Sale value of land after 5 year        2,360,000 cash outflow in year 0        5,460,000 useful life 5 yrs Dep        1,092,000 Sale value            560,000 tax            190,400 After tax sale value            369,600 Initial working capital year 0            660,000 Additional year 1 to 5              56,000 Production cost per stamp                   0.56 Fixed cost        1,080,000 year 0 1 2 3 4 5 initial cost      (5,460,000) working capital          (660,000) -56000 -56000 -56000 -56000 -56000 Fixed cost -1080000 -1080000 -1080000 -1080000 -1080000 Dep              (1,092,000) -1092000 -1092000 -1092000 -1092000 Total expenses -2172000 -2172000 -2172000 -2172000 -2172000 Tax savings -738480 -738480 -738480 -738480 -738480 After tax cost -1433520 -1433520 -1433520 -1433520 -1433520 Sale value    2,729,600 cashflow      (6,120,000) -1433520 -1433520 -1433520 -1433520 1296080 Present value                         1 0.89285 0.79719 0.71178 0.63551 0.56742 PV of cashflow      (6,120,000)              (1,279,918) (1,142,788) (1,020,351) (911,016)       735,422 NPV      (9,738,652) Total production for a year    106,000,000 cost per stamp                   0.09 Production cost per stamp                   0.56 Cost to be charged                   0.65

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.