6. Alton Enterprises needs someone to supply it with 150,000 cartons of machine

Question

6. Alton Enterprises needs someone to supply it with 150,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $425,000 to install the equipment necessary to start production; you will depreciate this cost straight-line to zero over the project’s life. You estimate that in five years, this equipment can be salvaged for $50,000. Your fixed production costs will be $150,000 per year, and your variable production costs should be $6 per carton. You also need an initial investment in net working capital of $60,000. If your tax rate is 34 percent and you require at least a 20 percent return on your investment, calculate the lowest bid price you can submit (and not suffer from the winner’s curse). This needs to be done in Excel.

Explanation / Answer

Years 0 1 2 3 4 5 Initial cost- Equipment -425000 Working capital -60000 fixed cost -150000 -150000 -150000 -150000 -150000 Variable cost -900000 -900000 -900000 -900000 -900000 Tax saving on depreciation 28900 28900 28900 28900 28900 Sale value at the end 50000 Release of working capital 60000 Cash flow -485000 -1021100 -1021100 -1021100 -1021100 -911100 Discount factor (20%) 1 0.833 0.694 0.579 0.482 0.402 Present value -485000 -850917 -709097 -590914 -492429 -366151 Net present value -3494507.5 No. of cartoon 150000 Cost per cartoon                (23) Thus, lowestbid price is $ 23 per cartoon

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