can someone help show me how to solve this question by hand rather than with exc
ID: 2742571 • Letter: C
Question
can someone help show me how to solve this question by hand rather than with excel?
Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price represents a financial break-even level for the project. Guthrie Enterprises needs someone to supply it with 142,000 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 $1,820,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that in five years this equipment can be salvaged for $152,000. Your fixed production costs will be $267,000 per year, and your variable production costs should be $8.70 per carton. You also need an initial investment in net working capital of $132,000. The tax rate is 35 percent and you require a return of 12 percent on your investment. Assume that the price per carton is $16.20.
A. Calculate the project NPV.
B. What is the minimum number of cartons per year that can be supplied and still break even?
C. What is the highest fixed costs that could be incurred and still break even?
Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price represents a financial break-even level for the project. Guthrie Enterprises needs someone to supply it with 142,000 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 $1,820,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that in five years this equipment can be salvaged for $152,000. Your fixed production costs will be $267,000 per year, and your variable production costs should be $8.70 per carton. You also need an initial investment in net working capital of $132,000. The tax rate is 35 percent and you require a return of 12 percent on your investment. Assume that the price per carton is $16.20.
A. Calculate the project NPV.
B. What is the minimum number of cartons per year that can be supplied and still break even?
C. What is the highest fixed costs that could be incurred and still break even?
Explanation / Answer
No. of cartons required = 142,000 per year
Duration of the project = 5 years
Cost of the project = $1,820,000 (Cash Outflow in the beginning)
Salvage value after 5 years = $ 152,000 (Cash Inflow at the end)
Additional working capital = $132,000
(Cash Outflow when invested in beginning and Cash Inflow when released at the end)
Annual Depreciation = $1,820,000 / 5 = $ 364,000
Annual Fixed Production Cost = $267,000
Variable production costs per carton = $8.70
Annual Variable Production Cost = $8.70 * 142,000 = $ 1,235,400
Annual Total Production Cost = $ (267,000 + 1,235,400) = $ 1,502,400
Price per carton = $16.20
Annual Sale Value = $16.20 * 142,000 = $ 2,300,400
Annual Gross Profit = Sale Value - Production Cost = $ (2,300,400 - 1,502,400) = $ 798,000
Annual Net/Taxable Profit = Gross Profit - Depreciation = $ (798,000 - 364,000) = $ 434,000
Annual Profit After Tax (PAT) = 65% of Taxable Profit = 0.65 * 434,000 = $ 282,100
Annual Cash Flow After Tax (CFAT) = PAT + Depreciation = $ (282,100 + 364,000)
= $ 646,100 (Cash Inflow per year)
Present Value of Cash Inflows:
(646,100/1.121) + (646,100/1.122) + (646,100/1.123) + (646,100/1.124) + (646,100/1.125) + (152,000/1.125) + (132,000/1.125) = $ 2,490,195.13
Present Value of Cash Outflows: Initial Cost + Investment in Working Capital
= $ (1,820,000 + 132,000) = $ 1,952,000
Net Present Value of the Project = $ (2,490,195.13 - 1,952,000) = $ 538,195.13
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.