Your company has been approached to bid on a contract to sell 4,400 voice recogn
ID: 2641768 • Letter: Y
Question
Your company has been approached to bid on a contract to sell 4,400 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.0 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $97,000 to be returned at the end of the project, and the equipment can be sold for $277,000 at the end of production. Fixed costs are $642,000 per year, and variable costs are $157 per unit. In addition to the contract, you feel your company can sell 9,700, 10,600, 12,700, and 10,000 additional units to companies in other countries over the next four years, respectively, at a price of $320. This price is fixed. The tax rate is 35 percent, and the required return is 9 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract?
Your company has been approached to bid on a contract to sell 4,400 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.0 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $97,000 to be returned at the end of the project, and the equipment can be sold for $277,000 at the end of production. Fixed costs are $642,000 per year, and variable costs are $157 per unit. In addition to the contract, you feel your company can sell 9,700, 10,600, 12,700, and 10,000 additional units to companies in other countries over the next four years, respectively, at a price of $320. This price is fixed. The tax rate is 35 percent, and the required return is 9 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract?
Explanation / Answer
Particulars Time PVF Amount PV Cash Outlows- Purchase - 1.0000 (4,000,000.00) (4,000,000.00) WC - 1.0000 (97,000.00) (97,000.00) PV of Cash Outflows (4,097,000.00) Cash Inflows 1.00 0.9174 960,415.00 881,114.68 Cash Inflows 2.00 0.8417 1,055,770.00 888,620.49 Cash Inflows 3.00 0.7722 1,278,265.00 987,055.12 Cash Inflows 4.00 0.7084 992,200.00 702,899.49 WC 4.00 0.7084 97,000.00 68,717.25 Salvage Value(net of tax)(277,000*.65) 4.00 0.7084 180,050.00 127,551.96 PV of Cash Inflows - 3,655,958.98 NPV (441,041.02) Company will not accept project as it is resulting in negative NPV Year 1.00 2.00 3.00 4.00 Units Sold 9,700.00 10,600.00 12,700.00 10,000.00 SP 320.00 320.00 320.00 320.00 VC 157.00 157.00 157.00 157.00 Contn per unit 163.00 163.00 163.00 163.00 Total Contn 1,581,100.00 1,727,800.00 2,070,100.00 1,630,000.00 FC 642,000.00 642,000.00 642,000.00 642,000.00 Depr(4,000,000/4) 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 Profit (60,900.00) 85,800.00 428,100.00 (12,000.00) Tax@35% (21,315.00) 30,030.00 149,835.00 (4,200.00) Profit after Tax (39,585.00) 55,770.00 278,265.00 (7,800.00) Add Depr 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 Cash flows after Tax 960,415.00 1,055,770.00 1,278,265.00 992,200.00
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