Dahlia Enterprises needs someone to supply it with 129,000 cartons of machine sc
ID: 2650614 • Letter: D
Question
Dahlia Enterprises needs someone to supply it with 129,000 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 $960,000 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 $79,000. Your fixed production costs will be $334,000 per year, and your variable production costs should be $11.20 per carton. You also need an initial investment in net working capital of $84,000. If your tax rate is 35 percent and your required return is 12 percent on your investment, what bid price should you submit? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $260,000, has a four-year life, and requires $80,000 in pretax annual operating costs. System B costs $366,000, has a six-year life, and requires $74,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever project is chosen, it will not be replaced when it wears out. The tax rate is 30 percent and the discount rate is 9 percent.
Calculate the NPV for both conveyor belt systems. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))
Dahlia Enterprises needs someone to supply it with 129,000 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 $960,000 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 $79,000. Your fixed production costs will be $334,000 per year, and your variable production costs should be $11.20 per carton. You also need an initial investment in net working capital of $84,000. If your tax rate is 35 percent and your required return is 12 percent on your investment, what bid price should you submit? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
1) Calcualtion of Bid Price
Depreciation on machine annually = 960000/5 i.e 192000 every year
Fixed production cost = 334000
Variable production cost = 129000 *11.20 i.e 1444800
Operating capital required = 84000
Bid price = Net cost to be recovered / Number of units
= 4887729/129000 i.e 37.88
2) Calculation of NPV
Project B should be accepted
For comparison we need to bring both the system at same level i.e annaully
NPV of project A = 378260/4 i.e 94565
NPV of project B = 516281/6 i.e 86047
Pariculars Year Cash Flows PVF @ 12% PV Equipment purchased 0 960000 1 960000 Operating capital required 0 84000 1 84000 Annual production cost ( Fixed + Variable) net of tax 1 to 5 1156220 3.6 4162392 Cash outflows (A) 5206392 Tax saving on depreciation 1 to 5 67200 3.6 241920 Operating capital returned 5 84000 0.567 47628 Salvage value net of capital gain tax 5 51350 0.567 29115 Cash Inflows (B) 318663 Net cost to be recovered (A-B) 4887729Related Questions
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