To solve the bid price problem presented in the text, we set the project NPV equ
ID: 2616995 • Letter: T
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.
Assuming that the price per carton is $16.50, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Assuming that the price per carton is $16.50, 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.)
Assuming that the price per carton is $16.50, 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.)
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 115,000 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 $820,000 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 $65,000. Your fixed production costs will be $320,000 per year, and your variable production costs should be $9.80 per carton. You also need an initial investment in net working capital of $70,000. Assume your tax rate is 35 percent and you require a 12 percent return on your investment.Explanation / Answer
a) Statement showing NPV
b) Break even point = Fixed cost/CPU
=Fixed cost+ depreciation/ CPU
=320000+164000/6.7
=484000/6.7
=72238.81 ie 72239 units
C) Highest level of fixed cost = units * CPU
=115000*6.7
= 770500
Particulars 0 1 2 3 4 5 NPV Cost of machine -820000 WC required -70000 SPPU 16.5 16.5 16.5 16.5 16.5 VCPU 9.8 9.8 9.8 9.8 9.8 CPU 6.7 6.7 6.7 6.7 6.7 No of units 115000 115000 115000 115000 115000 Total contribution 770500 770500 770500 770500 770500 Fixed cost 320000 320000 320000 320000 320000 Depreciation 164000 164000 164000 164000 164000 PBT 286500 286500 286500 286500 286500 Tax @ 35% 100275 100275 100275 100275 100275 PAT 186225 186225 186225 186225 186225 Add: depreciation 164000 164000 164000 164000 164000 Cash flow 350225 350225 350225 350225 350225 Salvage value(65000-35%) 42250.00 WC release 70000 Total cash flow -890000 350225 350225 350225 350225 462475 PVIF @ 12% 1 0.892857143 0.797193878 0.711780248 0.635518078 0.5674269 Present value -890000 312701 279197 249283 222574 262421 436176Related Questions
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