Dahlia Enterprises needs someone to supply it with 117,000 cartons of machine sc

Question

Dahlia Enterprises needs someone to supply it with 117,000 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 $840,000 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 $67,000. Your fixed production costs will be $322,000 per year, and your variable production costs should be $10.00 per carton. You also need an initial investment in net working capital of $72,000. If your tax rate is 30 percent and your required return is 11 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))

Explanation / Answer

Dahlia Enterprises Calculation of bid price Qty of cartons of screws /year          117,000 Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial Investment $       (840,000) Fixed Prduction cost $(assuming depreciation is part of it)       (322,000)       (322,000)       (322,000)       (322,000)       (322,000) Variable Production cost (1,170,000) (1,170,000) (1,170,000) (1,170,000) (1,170,000) Initial net working capital         (72,000) Depreciation Tax shield @30%           50,400           50,400           50,400           50,400           50,400 Salvage value           67,000 Net Cost (1,513,600) (1,441,600) (1,441,600) (1,441,600) (1,374,600) Discount fcator @11%              0.901              0.812              0.731              0.659              0.593 PV of costs    (5,353,109) (1,363,604) (1,170,035) (1,054,085)       (949,627)       (815,758) NPV of costs    (6,193,109) Annuity facor for discount              3.696 EAC -6193109/3.696    (1,675,671) So annual equivalent cost for 117000 cartons is $1675671 So annual equivalent cost per carton is $14.32 So the bid price for break even or NPV=0 will be $14.32 per carton So the bid price should be above $ 14.32 per carton to make profit

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