Consider a project to supply 119 million postage stamps per year to the U.S. Pos
ID: 2762541 • Letter: C
Question
Consider a project to supply 119 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 $2,090,000 five years ago; if the land were sold today, it would net you $2,290,000 aftertax. The land can be sold for $2,490,000 after taxes in five years. You will need to install $5.59 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 $690,000 at the end of the project. You will also need $790,000 in initial net working capital for the project, and an additional investment of $69,000 in every year thereafter. Your production costs are .69 cents per stamp, and you have fixed costs of $930,000 per year. If your tax rate is 35 percent and your required return on this project is 11 percent, what bid price should you submit on the contract? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.)
Explanation / Answer
0 1 2 3 4 5 Land oppturnity Cost -22,90,000 22,90,000 New plant -5590000 0 After-tax sale of salvag 4,48,500 NWC -7,90,000 -69,000 -69000 -69000 -69000 10,66,000 Net Investment -86,70,000 -69,000 -69,000 -69,000 -69,000 38,04,500 NPV = 0 =-8,670,000 + OCF (PVIFA5, 11%) - 69,000(PVIFA4, 11%) + 1,964,000(PVIF5, 11%) NPV = 0 =-8,670,000 + OCF (3.6959) - 69,000*(3.1024)+(3804500*.5935) NPV =-8,670,000 -255016.9+OCF(3.6959)+2257786 NPV =-6667231+OCF*(3.6959) OCF =6667231/3.6959 =1803955 Net Income =OCF - non cash expens ie depreciation =1803955-458000 =1345955 EBIT =1345955*100/65 =2070700 Total revenue =EBIT + Total cost =2070700+(119,000,000*.69)+(930,000)+458000 =85568700 Min. Bid per stamp =Total revenue / unit sold=85568700/119000000=.719065
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