To Whom It May Concern: Can you please answer part b? Thank you 14 value: 9.00 p

Question

To Whom It May Concern:

Can you please answer part b? Thank you

14 value: 9.00 points 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 114,000 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 $810,000 to install the equipment necessary to start production; you'll depreciate this cost straight- ine to zero over the project's life. You estimate that, in five years, this equipment can be salvaged for $64,000. Your fixed production costs will be $319,000 per year, and your variable production costs should be $9.70 per carton. You also need an initial investment in net working capital of $69,000. Assume your tax rate is 30 percent and you require a 11 percent return on your investment a. Assuming that the price per carton is $16.40, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ 518,909.85 b. Assuming that the price per carton is $16.40, 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 $16.40, 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 $519,574

Explanation / Answer

The NPV part (a) is calculated as follows:

Now for part (b), we have to calculate number of cartons so that NPV becomes 0

By trial and error, we get Number of cartons = 99,710 Cartons for part (b)

Year 0 1 2 3 4 5 Initial Cost -810000 WC -69000 Revenue 1869600 1869600 1869600 1869600 1869600 Fixed cost -319000 -319000 -319000 -319000 -319000 Variable cost -1105800 -1105800 -1105800 -1105800 -1105800 Dep. -162000 -162000 -162000 -162000 -162000 Salavage value 64000 Profit before tax 282800 282800 282800 282800 346800 taxes at 30% -84840 -84840 -84840 -84840 -104040 Profit after tax 197960 197960 197960 197960 242760 Add back dep. 162000 162000 162000 162000 162000 Add back WC 69000 Cash flow -879000 359960 359960 359960 359960 473760 NPV $ 518,909.85

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