Recall the question we worked in class……Cougar Athletics is soliciting bids on a

Question

Recall the question we worked in class……Cougar Athletics is soliciting bids on a 3-year contract to produce 3,000 t-shirts per year to be given away at athletic events. You have decided to bid on the contract. It will cost you $3 per shirt in variable costs (buying plain t-shirts and paying an employee to imprint them) and $5,000 per year in fixed costs. A t-shirt printing machine will cost $7,500. The machine will be depreciated to zero over its 3-year life and it will not have any salvage value. There are no net working capital implications for the project. If your tax rate is 20% and your required return on this project is 10%, how much would you bid for the contract? State your answer in the total price, not the per-unit price.

Explanation / Answer

Year 0 1 2 3 Machine cost 7500 Fixed cost 5000 5000 5000 Variable cost 9000 9000 9000 Depreciation 2500 2500 2500 Cash outflow -16500 -16500 -16500 Tax -3300 -3300 -3300 Net cash flow -13200 -13200 -13200 Required return 10% Net present value -40,326.45 Using NPV function in excel and rate as 10% So to get a return of 10% the company shoould minimum bid for 40326.45

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