Consider a project to supply 111 million postage stamps per year to the U.S. Pos

Question

Consider a project to supply 111 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 $2,010,000 five years ago; if the land were sold today, it would net you $2,210,000 aftertax. The land can be sold for $2,410,000 after taxes in five years. You will need to install $5.51 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 projects five-year life. The equipment can be sold for $610,000 at the end of the project. You will also need $710,000 in initial net working capital for the project, and an additional investment of $61,000 in every year thereafter. Your production costs are 0.61 cents per stamp, and you have fixed costs of $1,160,000 per year. If your tax rate is 30 percent and your required return on this project is 10 percent, what bid price should you submit on the contract?

Consider a project to supply 111 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 $2,010,000 five years ago; if the land were sold today, it would net you $2,210,000 aftertax. The land can be sold for $2,410,000 after taxes in five years. You will need to install $5.51 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 $610,000 at the end of the project. You will also need $710,000 in initial net working capital for the project, and an additional investment of $61,000 in every year thereafter. Your production costs are 0.61 cents per stamp, and you have fixed costs of $1,160,000 per year. If your tax rate is 30 percent and your required return on this project is 10 percent, what bid price should you submit on the contract? (Do not round intermediate calculations and round your final answer to 5 decimal places. (e.g., 32.16161)) Bid price $

Explanation / Answer

Cost for producing 555 million stamps Year 1 Year 2 Year 3 Year 4 Year 5 Total Land value Investment 2,210,000 2,210,000 Manufacturing plant 5,500,000 5,500,000 Working Capital 710,000 61,000 61,000 61,000 61,000 954,000 Total Capital Employed 8,420,000 8,481,000 8,542,000 8,603,000 8,664,000 9,618,000 Production Cost @ 0.62 5,500,000 5,500,000 5,500,000 5,500,000 5,500,000 27,500,000 Fixed Cost 1160000 1160000 1160000 1160000 1160000 5,800,000 Tax benefit on equipment depriciation @ 30% -293400 -293400 -293400 -293400 -293400 -1467000 Manufacturing cost 6,366,600 6,660,000 6,660,000 6,660,000 6,660,000 33,300,000 Add: Requried Return 10% 1,478,660 1,514,100 1,520,200 1,526,300 1,532,400 7,571,660 Deduct: Scrap value of equipment -610000 -610,000 Total Cost 40,261,660 Total Stamp production 111,000,000 111,000,000 111,000,000 111,000,000 111,000,000 555,000,000 Per Stamp Costing 0.07254

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