To solve the bid price problem presented in the text, we set the project NPV equ
ID: 2647757 • Letter: T
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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.
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.
Dahlia Enterprises needs someone to supply it with 128,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and youExplanation / Answer
Depreciation on straight line basis = ($950,000 - 0)/5 = 190,000
Given selling price = $17.80
Variable costs = 11.10
Fixed production cost = $333,000
Contribution per unit = $17.80 -$11.10 =$6.70
number of units =128,000
Total contribution earned =128,000*$6.70 =$857,600
Minus
Fixed costs +Depreciation= $333,000 + $190,000 =$523,000
Contribution before tax = $334,600
Minus tax = $113,764
Contribution after tax = $220,836
Cash in flow for each year till fourth year = Contribution after tax+Depreciation
=$220,836 +$190,000 =$410,836.
Cash inflow in fifth year = Contribution after tax+Depreciation +Working capital ploughed back+after tax cash flow on salvage value as the asset is written down to zero
=$220,836 +$190,000 + $83,000+$78,000 (1-.34)
=$545,316.
Cash ouflow in year 0 = Cost of the machine+ increase in net working capital
=$950,000+$83,000 =$1,033,000
Present value of cash inflows = Present value annuity factor for 4 years * Cash inflows +Present value factor for year 5 * cash inflow in year 5
=3.169865 * $410,836. +0.6209 *$545,316
=$1,302,294.66+$338,586.70
=$1,640,881.36
Net present value = Present value of cash inflows - Present value of cash outflows
=$1,640,881.36 - $1,033,000 = $607,881.36
Answer for point b:
Break evnen point is the number of units on sale of which the fixed costs incurred are covered.
Given selling price = $17.80
Variable costs = 11.10
Fixed production cost = $333,000
Depreciation on straight line basis = ($950,000 - 0)/5 =$190,000
Contribution per unit = $17.80 -$11.10 =$6.70
Break even sales= Contribution to be earned to cover fixed costs+Depreciation as depreciation is also considered as Fixed costs.
=$333,000+$190,000
=$523,000
Units to be sold to break even = Total fixed costs/Contribution per unit
=$523,000/$6.70
=78,059.70 rounded to 78,060 units.
Answer for question no:3
Maximum untis that can be supplied =128,000
Contribution per unit=$6.70
Therefore maximum amount of affordable fixed costs =128,000*6.70 =$857,600
This is because at break even point contribution earned = Fixed costs (including depreciation)
Fixed costs excluding depreciation = $857,600 - $190,000 = $667,600.
Maximum amount of fixed costs excluding depreciation = $667,600.
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