You are trying to win a government contract. Here is some information regarding

Question

You are trying to win a government contract. Here is some information regarding this contract

. – You need to produce 5 modified trucks per year for 4 years

– You can buy the truck platforms for $10,000 each ( this is a variable cost)

– Facilities will be leased for $24,000 per year (you should realize this is a fixed cost)

– Labor and material costs are $4,000 per truck (this is another variable cost) –

Need $60,000 investment in new equipment, depreciated straight-line to a zero salvage

– Actually expect to sell the equipment for $5000 at the end of 4 years

– Need $40,000 in net working capital

– Tax rate is 39%

– Required return is 20%

What is the bid Price?

Explanation / Answer

Need to find operating cash flow required to earn a 20% return. The price can then be determined. Year 0 1 2 3 4 OCF OCF OCF OCF OCF Change in NWC -40,000 40,000 Capital Spending -60,000 3,050 Cash Flow from Assets -100,000 OCF OCF OCF OCF + 43,050 Based on the assumptions in the problem, the OCF will be the same every year. Bring all known dollar amounts back to the present and net out with the year 0 cash flow. Cash Flow from Assets -79,239 OCF OCF OCF OCF Remember the sign convention using the PV formula; a negative sign was inserted to make the present value result positive as it should be. Now find the payment (OCF) for a 20% return. OCF = $30,609 Now we need to solve for sales: OCF = NI + depreciation 30,609 = NI = 60,000/4 Costs = 24,000 + 5(10,000+4,000) NI = 15,609 Costs = 94,000 NI = (Sales - Costs - Depreciation)(1 - T) 15,609 = (Sales - 94,000 - 15,000)(1 - .39) Sales = 134,589 Price per truck = 134,589 / 4 = 26,918 Bid price = $27,000

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