(40 Points) You are trying to win a government contract. Here is some informatio
ID: 2783364 • Letter: #
Question
(40 Points) You are trying to win a government contract. Here is some information regarding this contract. – You need to produce 5 modified trucks per year for 4 years – You can buy the truck platforms for $10,000 each ( this is a variable cost) – Facilities will be leased for $24,000 per year (you should realize this is a fixed cost) – Labor and material costs are $4,000 per truck (this is another variable cost) – Need $60,000 investment in new equipment, depreciated straight-line to a zero salvage – Actually expect to sell the equipment for $5000 at the end of 4 years – Need $40,000 in net working capital – Tax rate is 39% – Required return is 20%
What is the bid Price?
Explanation / Answer
Bid price should be minimum $212,533
Steps:
1. Initial cost = 60000 equipment + 40000 working capital
= 100,000
2. Depreciation = 60000/4 = $15,000
3. Compute total costs = Facilities + Labour and material + depreciation + Platform cost
4. Tax on total cost = 39%* Total cost
5. Salvage value = 5000* (1-39%) = 3050 (Since book value is zero, there will be 39% tax on capital gain of 5000)
6. Assume that working capital is recovered at the end of year 4.
Year Initial cost Facilities Platform cost Labor andmaterial Depreciation Total costs Tax on costs Post tax costs Salvage
(Post tax) Working capital
recovery Net cash flows=
Post tax costs +depreciation+
salvage + WC
Recovery 0 (100,000.00) 1 (24,000.00) (50,000.00) -20000 -15000 (109,000.00) 42,510.00 (66,490.00) (51,490.00) 2 (24,000.00) (50,000.00) -20000 -15000 (109,000.00) 42,510.00 (66,490.00) (51,490.00) 3 (24,000.00) (50,000.00) -20000 -15000 (109,000.00) 42,510.00 (66,490.00) (51,490.00) 4 (24,000.00) (50,000.00) -20000 -15000 (109,000.00) 42,510.00 (66,490.00) 3050 40000 (8,440.00) NPV (212,532.95)
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