Problem 10-35 Calculating a Bid Price [LO3] Your company has been approached to
ID: 2613678 • Letter: P
Question
Problem 10-35 Calculating a Bid Price [LO3]
Your company has been approached to bid on a contract to sell 4,900 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.5 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $102,000 to be returned at the end of the project, and the equipment can be sold for $282,000 at the end of production. Fixed costs are $647,000 per year, and variable costs are $162 per unit. In addition to the contract, you feel your company can sell 10,200, 11,100, 13,200, and 10,500 additional units to companies in other countries over the next four years, respectively, at a price of $345. This price is fixed. The tax rate is 30 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Your company has been approached to bid on a contract to sell 4,900 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.5 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $102,000 to be returned at the end of the project, and the equipment can be sold for $282,000 at the end of production. Fixed costs are $647,000 per year, and variable costs are $162 per unit. In addition to the contract, you feel your company can sell 10,200, 11,100, 13,200, and 10,500 additional units to companies in other countries over the next four years, respectively, at a price of $345. This price is fixed. The tax rate is 30 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Bid price should be $210.35
NPV is the present value of the future after-tax cash flows minus the investment outlay.
Outlay = investment cash flow at time zero =
TNOCF (terminal year non operating cash flow) = Salvage value + return of working capital - tax on sale of old equipment
Yearly Cash Flows = (S – C – D)(1 – T) + D
S = sales
C = cash operating expenses
D = depreciation charge
Bid Price 210.35 Required Return 12% Variable Cost 162.00 Fixed Cost 647000.00 Tax Rate 30% Fixed Capital Investment Working Capital Salvage Value 4500000.00 102000.00 282000.00 year 1.00 2.00 3.00 4.00 Units 4900.0000 4900.0000 4900.0000 4900.0000 Bid Price 210.3491 210.3491 210.3491 210.3491 Reveune 1030710.5192 1030710.5192 1030710.5192 1030710.5192 Extra units sales 10200.0000 11100.0000 13200.0000 10500.0000 Fixed price 345.0000 345.0000 345.0000 345.0000 Extra Revenue 3519000.0000 3829500.0000 4554000.0000 3622500.0000 Total Revenue 4549710.5192 4860210.5192 5584710.5192 4653210.5192 Cash operating expenses 3093200.0000 3239000.0000 3579200.0000 3141800.0000 Depreciation 1125000.0000 1125000.0000 1125000.0000 1125000.0000 Cash Flow 1357057.3634 1472347.3634 1741357.3634 1395487.3634 PV of CF 1211658.3602 1173746.3038 1239463.7757 886857.4477 Sum of PV 4511725.8873 TNOCF 299400.0000 PV of terminal CF 190274.1127 Outlay -4602000.0000 NPV =190274.1127+4409725.8873-4602000 100000.0000 Need to use What-If-Analysis in excel Data Tab>Data Tools to find out bid price which makes NPV $100,000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.