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 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- line 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 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

Explanation / Answer

A / 1 B C D E 2 Romo Enterprises 3 Quantity per annum            114,000 4 Life                         5 Yrs 5 Equipment cost $810,000 6 Depreciation to zero in                         5 Yrs 7 Yearly depreciation $162,000 8 Salvage value at the end of 5 years $64,000 9 Variable Cost per unit $9.70 10 Net working capital $69,000 11 Tax rate 30% 12 Expected return on investment 11% 13 14 a) Calculation of NPV 15 Quantity per annum            114,000 16 Price per unit $16.40 17 Sales $1,869,600 18 Less:Variable costs $1,105,800 =C15*C9 19 Contribution margin $763,800 20 Less:Fixed Costs $319,000 21 Net operating income $444,800 22 Less:Depreciation $162,000 23 Net Income before taxes $282,800 24 Less:Taxes @30% $84,840 25 Net Income after tax $197,960 26 Net Cash flow $359,960 =C25+C22 27 Increase in net working capital $69,000 28 29 Period Cashflow PV@11% 30 0 -$879,000 =-C5-C27 -$879,000 31 1 $359,960 $324,288 32 2 $359,960 $292,152 33 3 $359,960 $263,200 34 4 $359,960 $237,117 35 5 $492,960 $292,548 36 37 Total: $530,304.12 38 39 NPV=$530,304.12 40 41 b)Calculation of BE Quantity 42 Contribution margin per unit $6.70 =C19/C15 43 Fixed Costs $319,000 44 Break even Units               47,612 45 46 c) the maximum fixed costs per annum can be total contribution margin 47 = $763,800

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