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))

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

After Tax Salvage Value = .70*67000=46900

                                0              1              2              3              4              5

OCF                                        ?              ?              ?              ?              ?

NCS             -840000                                                                46900

ChNWC       -72000                                                                72000

CFFA          - 912000           ?              ?              ?              ?              ?+118900

To find OCF .

N=5, PV=-912000, F.V=118900, r=11% Calculate PMT Using Calculator

OCF=PMT=227668.31

OCF=(Sales-Costs)x(1-T)+Depr.xT

Depr.= 840000/5=168000

Costs= FC+VCxQ=322000+117000x10=1492000

Sales=(OCF-Depr xT +Costs x (1-T)/(1-T)

          =227668.31-168000x.30+1492000x.7/.7

           =1745240

Or 1745240/117000= 14.92 per Unit   

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