Your company has been approached to bid on a contract to sell 4,200 voice recogn

Question

Your company has been approached to bid on a contract to sell 4,200 voice recognition (VR) computer keyboards per 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 Due to technological improvements, beyond that time they will be outdated and no sales will be possible.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 $3.8 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 $95,000 to be returned at the end of the project, and the equipment can be sold for $275,000 at the end of production. Fixed costs are $640,000 per year, and variable costs are $155 per unit. In addition to the contract, you feel your company can sell 9,500, 10,400, 12,500, and 9,800 additional units to companies in other countries over the next four years, respectively, at a price of $310. This price is fixed. The tax rate is 40 percent, and the required return is 10 percent. The bid price you plan to submit is $290 per unit. What is the NPV of the project? What is the IRR? How much does the NPV change if you change the bid price to $289 per unit?

Please show all your work and how you got each answer.

Explanation / Answer

Working notes:

1) We assume that selling the additional units to other countries is a part of the project in question, so these sales are relevant for decision making.

2) It's also assumed that cross-country selling involves no extra fixed costs.

3) Annual depreciation = $3.8 million / 4 years = $0.95 million = $950,000

4) Depreciation being non-cash expense, is added back to Net Income to arrive at Cash Flow After Tax (CFAT).

5) Initial cost = Equipment cost + Working capital = $3.8 million + $0.095 million = $3.895 million

6) Salvage Value & Working capital are added back to CFAT at year 4 ($95,000 + 275,000 = $370,000)

NPV = Sum of discounted present values of all cash inflows & outflows.

IRR is found out by using Excel =IRR() built-in function.

When Price = $290, the NPV & IRR calculations are as follows.

NPV = $

NOTE: This problem requires huge computation & I've solved the problem for only the first question (P = $290).

Year Cost/WC/Salvage($) Domestic Sales (Unit) Domestic Revenue ($) VC: Domestic ($) Global Sales (Unit) Global Revenue ($) VC: Global ($) Total Revenue FC ($) Total VC ($) Depreciation ($) TC ($) Pre-Tax Income ($) Tax ($) Net Income ($) CFAT ($) Discount Factor @10% Discounted CFAT ($) (1) (2) (3) = (2) x $290 (4) = (2) x $155 (5) (6) = (5) x $310 (7) = (5) x $155 (8) = (3) + (6) (9) (10) = (4) + (7) (11) (12) = (9) + (10) + (11) (13) = (8) - (12) (14) = (13) x 0.4 (15) = (13) - (14) (16) = (1) + (15) + (11) (17) 18 = (16) x (17) 0 -38,95,000 -38,95,000 1.0000 -38,95,000 1 4,200 12,18,000 6,51,000 9,500 29,45,000 14,72,500 41,63,000 6,40,000 21,23,500 9,50,000 37,13,500 4,49,500 1,79,800 2,69,700 12,19,700 0.9091 11,08,818 2 4,200 12,18,000 6,51,000 10,400 32,24,000 16,12,000 44,42,000 6,40,000 22,63,000 9,50,000 38,53,000 5,89,000 2,35,600 3,53,400 13,03,400 0.8264 10,77,190 3 4,200 12,18,000 6,51,000 12,500 38,75,000 19,37,500 50,93,000 6,40,000 25,88,500 9,50,000 41,78,500 9,14,500 3,65,800 5,48,700 14,98,700 0.7513 11,25,995 4 3,70,000 4,200 12,18,000 6,51,000 9,800 30,38,000 15,19,000 42,56,000 6,40,000 21,70,000 9,50,000 37,60,000 4,96,000 1,98,400 2,97,600 16,17,600 0.6830 11,04,843 IRR = 15.74% NPV = 5,21,846

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

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