Dahlia Enterprises needs someone to supply it with 122,000 cartons of machine sc

Question

Dahlia Enterprises needs someone to supply it with 122,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you%u2019ve decided to bid on the contract. It will cost you $890,000 to install the equipment necessary to start production; you%u2019ll depreciate this cost straight-line to zero over the project%u2019s life. You estimate that in five years, this equipment can be salvaged for $72,000. Your fixed production costs will be $327,000 per year, and your variable production costs should be $10.50 per carton. You also need an initial investment in net working capital of $77,000. If your tax rate is 34 percent and your required return is 10 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

PVIFA10%,5=[1-(1+r)-n/r] =[1-(1.1)-5/0.1] =3.79

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After Tax salvage value =$72,000(1-0.34)=$47,520

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The equation for the NPV of the project is:
NPV =0=-$890,000-$77,000+OCF(PVIFA10%,5)+[(77,000+47,520)/(1+0.1)5]

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889,682.88=OCF(PVIFA10%,5)

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OCF =889,682.88/PVIFA10%,5

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OCF =$234,696.1

OCF =[(P-v)Q-FC](1-tc)+tcD

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234,696.1=[(P-10.5)122,000-327,000](1-0.34)+0.34(890,000/5)

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234,696.1=[(P-10.5)80,520-215,820]+60520

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389,996.1=(P-10.5)80,520

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P=$15.34-------------answer

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