To solve the bid price problem presented in the text, we set the project NPV equ

Question

To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems. Romo Enterprises needs someone to supply it with 118,000 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 $850,000 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 $68,000. Your fixed production costs will be $323,000 per year, and your variable production costs should be $10.10 per carton. You also need an initial investment in net working capital of $73,000. Assume your a. Assuming that the price per carton is $16.80, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Assuming that the price per carton is $16.80, find the quantity of cartons per year you need to supply to break even. (Do not round intermediate calculations and round your answer to nearest whole number.) Quantity of cartons c. Assuming that the price per carton is $16.80, find the highest level of fixed costs you could afford each year and still break even. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Fixed costs

Explanation / Answer

(a) Year 0    1 -5 5 Cost of equipment -850000 Net Working capital -73000 73000 Revanue (Units sold X SP. P.u.) 1982400 Less : Variable cost (VCp.u X Units) 1191800 Contribution margin 790600 Less : Fixed Cost + Depreciation             (323000 + 170000) 493000 EBIT 297600 Less: Tax @ 35% 104160 Net Income 193440 Add: Depreciation 170000 CFAT 363440 Post tax Salvage value (68000 x (1-0.35)) 44200 Cash flows -923000 363440 117200 PV Factors @ 12% 1 3.6048 0.56742686 Present value of cash flows -923000 1310119.86 66502.4275 NPV = sum of PV of Cashflows 453622.29 Depreciation = 850000/5 = 170000 (b) To Break Even NPV should be equal to Zero - NPV = Sum of PV of cash flows i.e. -923000+66502.4275 + operating cash flows = 0 Operating cash flows = 856497.5725 Annual OCF = PV/ Annuity factor = 856497.6/3.6048 =237600.8 Let BEP Units be B [(16.8 x B -10.1 B -493000) X (1-0.35)] + 170000 =237600.8 (16.8 - 10.1) B -493000 = (237600.8 - 170000)/0.65 6.7 B = 104001.2 + 493000 B = 597001.2/6.7 89104.652583 ( c) To Break Even NPV should be equal to Zero - NPV = Sum of PV of cash flows i.e. -923000+66502.4275 + operating cash flows = 0 Operating cash flows = 0 Annual OCF = PV/ Annuity factor = 856497.6/3.6048 =237600.8 Let BEP Fixed cost be F (Contribution - F) x 0.65] + 170000 =237682.4 790600 - F = (237600.8 - 170000)/0.65 F = 790600 - 104001.2 Maximum Fixed cost = 686598.827695 Fixed cost other then depreciation = 686598.8277 - 170000                          = 516598.827695 Please provide feedback… Thanks in Advance :-)

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.