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’ve decided to bid on the contract. It will cost you $890,000 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 $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))

Bid price: $

(Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Bid price: $

Explanation / Answer

Calculation of Bid Price:

Year

Cash Flow

PVF(10%)

PV =CF*PVF

Cost of Equipment

0

$ 890,000.00

   1.00000

$      890,000.00

Less: Tax Saving on depreciation

1 to 5

$ (55,624.00)

   3.79079

$   (210,858.72)

((890000 -72000) / 5)*34%

Less: Salvage value (Net of tax)

5

$ (72,000.00)

   0.62092

$      (44,706.34)

Fixed production costs (Net of Tax)

1 to 5

$ 215,820.00

   3.79079

$      818,127.60

327000* (1-34%)

Variable production costs (Net of Tax)

1 to 5

$ 845,460.00

   3.79079

$ 3,204,958.58

122000*10.50 * (1-34%)

Initial investment in net working capital

0

$    77,000.00

   1.00000

$        77,000.00

Bid Price

$ 4,734,521.12

Calculation of Bid Price:

Year

Cash Flow

PVF(10%)

PV =CF*PVF

Cost of Equipment

0

$ 890,000.00

   1.00000

$      890,000.00

Less: Tax Saving on depreciation

1 to 5

$ (55,624.00)

   3.79079

$   (210,858.72)

((890000 -72000) / 5)*34%

Less: Salvage value (Net of tax)

5

$ (72,000.00)

   0.62092

$      (44,706.34)

Fixed production costs (Net of Tax)

1 to 5

$ 215,820.00

   3.79079

$      818,127.60

327000* (1-34%)

Variable production costs (Net of Tax)

1 to 5

$ 845,460.00

   3.79079

$ 3,204,958.58

122000*10.50 * (1-34%)

Initial investment in net working capital

0

$    77,000.00

   1.00000

$        77,000.00

Bid Price

$ 4,734,521.12

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