To solve the bid price problem presented in the text, we set the project NPV equ
ID: 2647874 • Letter: T
Question
To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems.
To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems.
Dahlia Enterprises needs someone to supply it with 128,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and youExplanation / Answer
a. Calculation of NPV of the Project Year Cash flows PVF (10%) PV =CF*PVF Sales Value (128000*$17.80) $ 2,278,400.00 Less: variable Cost = (128000*$11.10) $ (1,420,800.00) Less: Fixed Cost $ (333,000.00) Less: Depreciation $ (173,400.00) (950000-83000)/5 Income before tax $ 351,200.00 Less: Tax =Income before tax*34% $ (119,408.00) Income after tax $ 231,792.00 Add: Depreciation $ 173,400.00 Cash Flows after tax 1 to 5 $ 405,192.00 3.79079 $ 1,535,997.78 Cost of equipment 0 $ (950,000.00) 1.00000 $ (950,000.00) Initial investment in net working capital 0 $ (83,000.00) 1.00000 $ (83,000.00) Net working capital released at the end 5 $ 83,000.00 0.62092 $ 51,536.47 Net Present value = Sum of PVs $ 554,534.25 b. Calculation of Breakeven units For Break Even the NPV shall be ZERO Assuming the break even quantity be X Year Cash flows PVF (10%) PV =CF*PVF Sales Value (X*$17.80) 17.8 X Less: variable Cost = (X*$11.10) - 11.1X Less: Fixed Cost $ (333,000.00) Less: Depreciation $ (173,400.00) (950000-83000)/5 Income before tax 6.7 X - 506400 Less: Tax =Income before tax*34% - (2.278 X - 172176) Income after tax 4.422 X - 334224 Add: Depreciation $ 173,400.00 Cash Flows after tax 1 to 5 4.422 X - 160824 3.79079 16.763 X - 609650 Cost of equipment 0 $ (950,000.00) 1.00000 $ (950,000.00) Initial investment in net working capital 0 $ (83,000.00) 1.00000 $ (83,000.00) Net working capital released at the end 5 $ 83,000.00 0.62092 $ 51,536.47 Net Present value = Sum of PVs 16.763 X -1591113.53 Hence the equation come out : 16.763 X -1591113.53 = 0 So X = 1591113.53 / 16.763 = 94918.18 So Break even units shall be = 94919 Units'' a. Calculation of Fixed cost for breakeven Assuming the break even Fixed cost be X For Break Even the NPV shall be ZERO Year Cash flows PVF (10%) PV =CF*PVF Sales Value (128000*$17.80) $ 2,278,400.00 Less: variable Cost = (128000*$11.10) $ (1,420,800.00) Less: Fixed Cost X Less: Depreciation $ (173,400.00) (950000-83000)/5 Income before tax 684200 -X Less: Tax =Income before tax*34% 232628 - 0.34 X Income after tax 451572 - 0.66 X Add: Depreciation $ 173,400.00 Cash Flows after tax 1 to 5 624972 - 0.66 X 3.79079 2369137.61 - 2.5019 X Cost of equipment 0 $ (950,000.00) 1.00000 $ (950,000.00) Initial investment in net working capital 0 $ (83,000.00) 1.00000 $ (83,000.00) Net working capital released at the end 5 $ 83,000.00 0.62092 $ 51,536.47 Net Present value = Sum of PVs 1387674.08 - 2.5019 X Hence the equation come out : 1387674.08 - 2.5019 X = 0 X = 1387674.08 / 2.5019 = 554648.10 Hence Break even Fixed cost is = $554648.10
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.