Romo Enterprises needs someone to supply it with 130,000 cartons of machine scre

Question

Romo Enterprises needs someone to supply it with 130,000 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 $970,000 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 $80,000. Your fixed production costs will be $335,000 per year, and your variable production costs should be $11.30 per carton. You also need an initial investment in net working capital of $85,000. If your tax rate is 30 percent and you require a return of 11 percent on your investment, what bid price should you submit?

Explanation / Answer

Year/Description of item 0 1 2 3 4 5 Cost of production=Quantity*VC+FC=130000*11.30+335000 (A) 1804000 1804000 1804000 1804000 1804000 Equipment (B) 970000 Tax shield on depriciation=-0.30*(970000/5) © -58200 -58200 -58200 -58200 -58200 Savings from Salvage Value after tax=-80000*(1-0.30) (D) -56000 Working Capital (E) 85000 -85000 Cash flow=A+B+C+D+E (F) 1055000 1745800 1745800 1745800 1745800 1604800 Add return @11% (G) 116050 192038 192038 192038 192038 176528 Add Tax @30% (H) 34815 57611.4 57611.4 57611.4 57611.4 52958.4 Total price =F+G+H 1205865 1995449 1995449 1995449 1995449 1834286 Total Price to be Quoted 11021949

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