Your company has been approached to bid on a contract to sell 4,900 voice recogn
ID: 2717980 • Letter: Y
Question
Your company has been approached to bid on a contract to sell 4,900 voice recognition (VR) computer keyboards a 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 Due to technological improvements, beyond that time they will be outdated and no sales will be possible.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 $4.5 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 $102,000 to be returned at the end of the project, and the equipment can be sold for $282,000 at the end of production. Fixed costs are $647,000 per year, and variable costs are $162 per unit. In addition to the contract, you feel your company can sell 10,200, 11,100, 13,200, and 10,500 additional units to companies in other countries over the next four years, respectively, at a price of $345. This price is fixed. The tax rate is 30 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract?
Your company has been approached to bid on a contract to sell 4,900 voice recognition (VR) computer keyboards a 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 Due to technological improvements, beyond that time they will be outdated and no sales will be possible.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 $4.5 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 $102,000 to be returned at the end of the project, and the equipment can be sold for $282,000 at the end of production. Fixed costs are $647,000 per year, and variable costs are $162 per unit. In addition to the contract, you feel your company can sell 10,200, 11,100, 13,200, and 10,500 additional units to companies in other countries over the next four years, respectively, at a price of $345. This price is fixed. The tax rate is 30 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract?
Explanation / Answer
NET PRESENT VALUE OF THE PROJECT IS:
AS THE NPV IS POSITIVE, THE PROJECT SHOULD BE ACCEPTED. THE BID PRICE SHOULD BE
= 5002087 / 4900 / 4 years = $ 255 per voice recognition (VR) = BID PRICE
year total units sold contribution (345-162) fixed cost depreciation cash flow before tax cash flow after tax (30%) working capital + salvage value total cash inflow discount rate present v A B C D E (B-C-D) F G H (F+G+D) I J (H/I) 0 (4500000) (102000) (4602000) - (4602000) 1 15100 4273300 647000 1125000 2501300 1750910 0 2875910 1.12 2567777 2 16000 4528000 647000 1125000 2756000 1929200 0 3054200 1.25 2443360 3 18100 5122300 647000 1125000 3350300 2345210 0 3470210 1.40 2478721 4 15400 4358200 647000 1125000 2586200 1810340 384000 3319340 1.57 2114229 NPV 5002087Related Questions
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