You are required to submit a bid to supply 200,000,000 widgets per year to the S

Question

You are required to submit a bid to supply 200,000,000 widgets per year to the State of Illinois for the next five years. Your company has an idle tract of real estate that cost $1,500,000 ten years ago; if your company sold the land today, it would generate $3,000,000 after the taxes were paid. The land can be sold for $3,500,000 after taxes in five years. You will need to install $4,900,000 in new plant and equipment to actually produce the widgets; this plant and equipment will be depreciated straight-line to zero over the projects five year life. The equipment can be sold for $610,000 at the end of the project. You will need $500,000 in initial working capital for the project, and an additional investment of $60,000 in every year thereafter. Your production costs are .6 cents per widget and you will have fixed costs of $800,000 per year. If your tax rate is 34% and your required return is 14%, what bid price per widget should you submit?

Explanation / Answer

The bid price should be the value where the Net Present Value = 0

920065699.64*Bid Price - 563546267.08 - 4900000 - 3000000 = 0

Bid Price = $0.621

Year Opportunity Cost Machinery Working Capital Fixed Cost Tax saving on depreciation Variable Cost @ 0.6 per widget Revenue Net Income
[Revenue - (Variable Cost + Fixed Cost + Depreciation)] Tax on Income @ 34% 0 -3,000,000 -4,900,000 1 -600000 -800000 333200 -120000000 200000000* Bid Price 200000000* Bid Price - 121780000 68000000* Bid Price - 41405200 2 -60000 -800000 333200 -120000000 200000000* Bid Price 200000000* Bid Price - 121780000 68000000* Bid Price - 41405200 3 -60000 -800000 333200 -120000000 200000000* Bid Price 200000000* Bid Price - 121780000 68000000* Bid Price - 41405200 4 -60000 -800000 333200 -120000000 200000000* Bid Price 200000000* Bid Price - 121780000 68000000* Bid Price - 41405200 5 610000 780000 -800000 333200 -120000000 200000000* Bid Price 200000000* Bid Price - 121780000 68000000* Bid Price - 41405200 Year Outflow other than tax Tax on Income Cash Inflow PV factor @ 14% PV Outflow other than tax PV of Tax on income PV Cash Inflow Net PV 1 -121,066,800 68000000* Bid Price - 41405200 200000000* Bid Price 0.877192982 -106198947.4 59649122.80* Bid Pirce - 36320350.87 175438596.49* Bid Price 235087719.29*Bid Price -138058904.28 2 -120,526,800 68000000* Bid Price - 41405200 200000000* Bid Price 0.769467528 -92741458.91 52323791.94* Bid Price - 31859956.91 153893505.69* Bid Price 206217297.63*Bid Price -120688789.53 3 -120,526,800 68000000* Bid Price - 41405200 200000000* Bid Price 0.674971516 -81352156.94 45898063.10* Bid Price - 27947330.62 134994303.24* Bid Price 180892366.34*Bid Price -105867359.24 4 -120,526,800 68000000* Bid Price - 41405200 200000000* Bid Price 0.592080277 -71361541.17 40261458.86* Bid Price - 24515202.30 118416055.47* Bid Price 158677514.33*Bid Price -92866104.60 5 -119,076,800 68000000* Bid Price - 41405200 200000000* Bid Price 0.519368664 -61844758.57 35317069.18* Bid Price - 21504563.42 103873732.87* Bid Price 139190802.05*Bid Price -61844758.57 920065699.64*Bid Price - 563546267.08

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.