Heer Enterprises needs someone to supply it with 225,000 cartons of machine scre

Question

Heer Enterprises needs someone to supply it with 225,000 cartons of machine screws per year to support its manufacturing needs over the next 7 years, and you've decided to bid on the contract. It will cost you $1,170,000 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 7 years, this equipment can be salvaged for $75,000. Your fixed production costs will be $360,000 per year, and your variable production costs should be $12.75 per carton. You also need an initial investment in net working capital of $112,500, all of which will be recovered when the project ends. Your tax rate is 32 percent and you require a 13 percent return on your investment. What bid price per carton should you submit?

Please show how you got your answer so I can teach myself how to do the problem.

Explanation / Answer

Heer Enterprises needs someone to supply it with 225,000 cartons of machine screws per year to support its manufacturing needs over the next 7 years, and you've decided to bid on the contract. It will cost you $1,170,000 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 7 years, this equipment can be salvaged for $75,000. Your fixed production costs will be $360,000 per year, and your variable production costs should be $12.75 per carton. You also need an initial investment in net working capital of $112,500, all of which will be recovered when the project ends. Your tax rate is 32 percent and you require a 13 percent return on your investment. What bid price per carton should you submit?

Total Present Value of Cash Outflow = 1170000 + 112500 + 360000*(1-32%)PVIFA(13%,7)+ 12.75*225000*(1-32%)PVIFA(13%,7) - 1170000/7 * 32% PVIFA(13%,7) -75000PVIF(13%,7) - 112500 PVIF(13%,7)

PVIFA is the Present Value Interest factor of Annuity, It can be viewed from table or It can be calculated using Excel Formula

PVIF is the Present Value Interest factor , It can be viewed from table or It can be calculated using Excel Formula

PVIFA(13%,7) = pv(13%,7,1,0) = 4.4226

PVIF(13%,7) = pv(13%,7,0,1) = 0.4251

Total Present Value of Cash Outflow= 1170000 + 112500 + 360000*(1-32%) *4.4226+ 12.75*225000*(1-32%) *4.4226 - 1170000/7 * 32% *4.4226 -75000* 0.4251 - 112500 * 0.4251

Total Present Value of Cash Outflow = $ 10,676,287.26

Note :The Minimum Price should be that at which NPV will Be Zero, and NPV will be Zero only

Total Present Value of Cash Outflow = Total Present Value of Cash Inflow

Therefore, Total Present Value of Cash inflow = $ 10,676,287.26

Total Present Value of Cash inflow = Minimum Bid Price*225000*(1-32%)*PVIFA(13%,7)

10,676,287.26 = Minimum Bid Price *225000* 68% * 4.4226

Minimum Bid Price = 10,676,287.26/676657.8

Minimum Bid Price = $ 15.78

Answer

Minimum Bid Price = $ 15.78

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