Your company has been approached to bid on a contract to sell 3,600 voice recogn
ID: 2773467 • Letter: Y
Question
Your company has been approached to bid on a contract to sell 3,600 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.2 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $89,000 to be returned at the end of the project, and the equipment can be sold for $269,000 at the end of production. Fixed costs are $634,000 per year, and variable costs are $149 per unit. In addition to the contract, you feel your company can sell 8,900, 9,800, 11,900, and 9,200 additional units to companies in other countries over the next four years, respectively, at a price of $280. This price is fixed. The tax rate is 30 percent, and the required return is 11 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Your company has been approached to bid on a contract to sell 3,600 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.2 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $89,000 to be returned at the end of the project, and the equipment can be sold for $269,000 at the end of production. Fixed costs are $634,000 per year, and variable costs are $149 per unit. In addition to the contract, you feel your company can sell 8,900, 9,800, 11,900, and 9,200 additional units to companies in other countries over the next four years, respectively, at a price of $280. This price is fixed. The tax rate is 30 percent, and the required return is 11 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Cost of Equipment $ 3,200,000.00 Add: Working Capital $ 89,000.00 Total Initial Capital $ 3,289,000.00 Year Cash Outlay pv factor at 11% Present Value 0 $ (3,289,000.00) 1.0000 $ (3,289,000.0000) 1 $ 1,502,450.00 0.9091 $ 1,365,863.6364 2 $ 1,584,980.00 0.8264 $ 1,309,900.8264 3 $ 1,777,550.00 0.7513 $ 1,335,499.6243 4 $ 1,798,960.00 0.6830 $ 1,228,713.8857 Total $ 1,950,977.9728 Statement of Cashinflows from the project: Year 1.00 2 3 4 Yearly volume (Units) 12500.00 13400 15500 12800 Sale Price 280.00 280.00 280.00 280.00 Variable cost 149.00 149.00 149.00 149.00 Contribution 131.00 131.00 131.00 131.00 Total Contribution 1637500.00 1755400.00 2030500.00 1676800.00 Less: Fixed Cost 634000.00 634000.00 634000.00 634000.00 Income before tax 1003500.00 1121400.00 1396500.00 1042800.00 Tax @30% 301050.00 336420.00 418950.00 312840.00 EAT 702450.00 784980.00 977550.00 729960.00 Add: Depreciation 800000.00 800000.00 800000.00 800000.00 Operating Cash 1502450.00 1584980.00 1777550.00 1529960.00 Add: Solvage 269000 Total Cash inflows 1502450.00 1584980.00 1777550.00 1798960.00 Answer: As net present value of the project is 1,950,978 is higher than the expectation Project will be accepted. The bid price can be set any where in between Variable cost and the market price of $280 in order to get the bid. As company can sell outside at a price of $280. I will set the bid price of $280 each. Please note: Company can make a cash flow more than 100,000 even it will not get order of 3600 units Year Cash Outlay pv factor at 11% Present Value 0 $ (3,289,000.00) 1.0000 $ (3,289,000.0000) 1 $ 1,172,330.00 0.9091 $ 1,065,754.5455 2 $ 1,254,860.00 0.8264 $ 1,037,074.3802 3 $ 1,447,430.00 0.7513 $ 1,087,475.5823 4 $ 1,468,840.00 0.6830 $ 1,003,237.4838 Total $ 904,541.9917 Statement of Cashinflows from the project: Year 1.00 2 3 4 Yearly volume (Units) 8900.00 9800 11900 9200 Sale Price 280.00 280.00 280.00 280.00 Variable cost 149.00 149.00 149.00 149.00 Contribution 131.00 131.00 131.00 131.00 Total Contribution 1165900.00 1283800.00 1558900.00 1205200.00 Less: Fixed Cost 634000.00 634000.00 634000.00 634000.00 Income before tax 531900.00 649800.00 924900.00 571200.00 Tax @30% 159570.00 194940.00 277470.00 171360.00 EAT 372330.00 454860.00 647430.00 399840.00 Add: Depreciation 800000.00 800000.00 800000.00 800000.00 Operating Cash 1172330.00 1254860.00 1447430.00 1199840.00 Add: Solvage 269000 Total Cash inflows 1172330.00 1254860.00 1447430.00 1468840.00
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.