2. ABC Enterprise needs someone to supply it with 100,000 cartons of machine scr

Question

2.      ABC Enterprise needs someone to supply it with 100,000 cartons of machine screws per year to support its manufacturing needs over the next 4 years, and you've decided to bid on the contract. Before bidding the contract, you have already spent $5,000 to conduct market research. It will cost you $20,000 to install the equipment necessary to start production; you will depreciate straight-line to zero over the project's life. You estimate that in 4 years, this equipment can be salvaged for $40,000. To purchase the equipment, it appears that the firm would have to borrow $100,000 at 5% interest from its local bank, resulting in additional interest payments of $5,000 per year. Your fixed production costs will be $100,000 per year, and your variable production costs should be $5 per carton. You also need an initial increase in inventory of $50,000, all of which will be recovered when the project ends. Assume that your tax rate is 34% and you require a 10% return on your investment. What bid price per carton should you submit?

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Hi, i have done a similar problem in my exam: hope this helps,

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