A utilisation of cash flow analysis is setting the bid price on the project.To c

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A utilisation of cash flow analysis is setting the bid price on the project.To calculate the bid price we set the project NPW equal zero and find a required price.Thus the bid price represents a financial break even level for the project.Guthrie enterprise needs someone to supply it with 140000 cartoons of machine screws per year to support its manufacturing needs over the next five years and you decided to bid on the contract.Before you made the decision you paid consulting firm $100000 last year for evaluating this project.It will cost you $1800000 to install the equipment to start production and you will depreciate this cost straight line to zero over the project life.in five years this equipment can be salvage fit $150000Your fixed production cost will be $265000 per year and variable shoul be $8.50 per cartoon.You need initial investment in net working capital $130000 tax rate is 35% and required 14 % return on your investment.What bid price shoul you submit?Show all working steps explanation and formulas A utilisation of cash flow analysis is setting the bid price on the project.To calculate the bid price we set the project NPW equal zero and find a required price.Thus the bid price represents a financial break even level for the project.Guthrie enterprise needs someone to supply it with 140000 cartoons of machine screws per year to support its manufacturing needs over the next five years and you decided to bid on the contract.Before you made the decision you paid consulting firm $100000 last year for evaluating this project.It will cost you $1800000 to install the equipment to start production and you will depreciate this cost straight line to zero over the project life.in five years this equipment can be salvage fit $150000Your fixed production cost will be $265000 per year and variable shoul be $8.50 per cartoon.You need initial investment in net working capital $130000 tax rate is 35% and required 14 % return on your investment.What bid price shoul you submit?Show all working steps explanation and formulas

Explanation / Answer

100000 paid to consulting Firm Last year is sunk cost, Hence no relevance in Decision Making To find the bid price, we need to calculate all other cash flows for the project, and then solve for the bid price. The aftertax salvage value of the equipment is After Tax Salvage Value = 150000*(1-0.35) = 97500 Now we can solve for the necessary OCF that will give the project a zero NPV. The equation for the NPV of the project is NPV = 0 = -1800000 - 130000 + OCF (PVIFA 14%, 5) + ((130000+ 97500)/(1.14^5)) OCF (PVIFA 14%, 5) = 1800000 + 130000 - ((130000+ 97500)/(1.14^5)) OCF (PVIFA 14%, 5) = 1930000 - ((227500)/(1.14^5)) OCF (PVIFA 14%, 5) = 1811843.63 OCF = 1811843.63 / (PVIFA 14%, 5) OCF = 1811843.63 / 3.433080969 OCF = 527760.24 The easiest way to calculate the bid price is the tax shield approach, so OCF = 527760.24 = ((P-v)*Q - FC) * (1-Tax Rate) + Depreciation *Tax Rate 527760.24 = ((P- 8.50 )* 140000 - 265000) * (1-0.35) + ((1800000/5) *0.35) ((P- 8.50 )* 140000 - 265000) * (1-0.35) = 527760.24 - (360000*0.35) (91000 P - 773500 - 172250) = 527760.24 - 126000 91000 P = 527760.24 - 126000 + 945750 91000 P = 1347510 Bid price P = 1347510/ 91000 Bid price P = 14.81

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