Three bidders for a satellite system have given the following offers: Bidder A F

Question

Three bidders for a satellite system have given the following offers:

Bidder A

First payment:                   $100m at the start

Second Payment:              $250m at the beginning of second year

Third payment:                  $250m at the end of third year

Final payment:                   $400m on completion at the end of 4th year.

Bidder B

First payment:                   $ 200m at the start

Second Payment:              $ 250m at the end of second year

Third payment:                  $ 250m at the end of third year

Final payment:                   $ 300m on completion at the end of 4th year.

Bidder C

First payment:                   No payment at start

Second Payment:              $300m at the beginning of second year

Third payment:                  $200m at the beginning of third year

Final payment:                   $500m on completion at the end of 4th year.

All three bidders have been assessed to be technically compliant.

a) Assuming 8% discount +inflation rate, which bidder will you recommend to your management?

b) The annual operations &maintenance after completion is estimated to be $40 million, payable at the end of each year and with 5% annual increase thereafter.

Your customer has committed to pay $250 million annually at the end of the each year after completion, with the first payment at the end of 5th year from start and with 5% annual increase thereafter. The discount + inflation rate is still 8%.

For the best bidder, calculate the NPV until it becomes positive.

Explanation / Answer

Answer a

Bidder C

Since the highest NPV is for bidder B at 771.6, hence bidder B should be selected

Bidder A 0 1 2 3 4.0 Net cash flows 100.0 250.0 0.0 250.0 400.0 Discounting factor 0.926 0.857 0.794 0.735 0.681 Present value of cash flows 92.6 214.3 0.0 183.8 272.2 Net present value 762.9

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