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). Needs to be in Excel.

Explanation / Answer

Ans: After tax selvage value= 50000(1-34%)= 33000 Now calculate other Cash flow NPV= cash outflow- cash inflow (-$425000-$60000)- [PVAF(20%, 5th year)($60000+$33000)] -522377 Equivelent cash flow= 522377/PVAF(20%, 5 years) 174708 OCF=174708== [(P – v)Q – FC ](1 – tc) + tcXD 174708=[(p-6)15000-150000)(1-.34)+.34($425000/5) solve it, P=$74.73

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