Consider a project to supply 118 million postage stamps per year to the U.S. Pos
ID: 2791953 • Letter: C
Question
Consider a project to supply 118 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 $2,080,000 five years ago; if the land were sold today, it would net you $2,280,000 aftertax. The land can be sold for $2,480,000 after taxes in five years. You will need to install $5.58 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 $680,000 at the end of the project. You will also need $780,000 in initial net working capital for the project, and an additional investment of $68,000 in every year thereafter. Your production costs are 0.68 cents per stamp, and you have fixed costs of $1,050,000 per year. If your tax rate is 34 percent and your required return on this project is 12 percent, what bid price should you submit on the contract? (Do not round intermediate calculations and round your final answer to 5 decimal places. (e.g., 32.16161))
Consider a project to supply 118 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 $2,080,000 five years ago; if the land were sold today, it would net you $2,280,000 aftertax. The land can be sold for $2,480,000 after taxes in five years. You will need to install $5.58 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 $680,000 at the end of the project. You will also need $780,000 in initial net working capital for the project, and an additional investment of $68,000 in every year thereafter. Your production costs are 0.68 cents per stamp, and you have fixed costs of $1,050,000 per year. If your tax rate is 34 percent and your required return on this project is 12 percent, what bid price should you submit on the contract? (Do not round intermediate calculations and round your final answer to 5 decimal places. (e.g., 32.16161))
Explanation / Answer
The bid price is the price at which the NPV of the project is zero. We get at bid price = $0.704383, we get NPV = 0
In this case the land cost is a sunk cost and should not be calculated in project evaluation.
All the working capital will be recovered at the end of the project.
Depreciation = Investment / No. of years = 5,580,000 / 5 = 1,116,000
Cash Flows = Net Income + Depreciation + Investment + NWC + After-tax Salvage Value
NPV = NPV(rate = 12%, CF1 = 1517388.... CF5 = 3086188) - 6360000 = 0
Stamp 0 1 2 3 4 5 Investment -5,580,000 NWC -780,000 -68,000 -68,000 -68,000 -68,000 1,052,000 Salvage 680,000 Revenues 83,117,194 83,117,194 83,117,194 83,117,194 83,117,194 VC -80,240,000 -80,240,000 -80,240,000 -80,240,000 -80,240,000 FC -1,050,000 -1,050,000 -1,050,000 -1,050,000 -1,050,000 Depreciation -1,116,000 -1,116,000 -1,116,000 -1,116,000 -1,116,000 EBT 711,194 711,194 711,194 711,194 711,194 Tax (34%) -241,806 -241,806 -241,806 -241,806 -241,806 Net Income 469,388 469,388 469,388 469,388 469,388 Cash Flows -6,360,000 1,517,388 1,517,388 1,517,388 1,517,388 3,086,188 NPV 0Related Questions
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