Consider a project to supply 119 million postage stamps per year to the U.S. Pos

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?

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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