You are considering making a bid for a contract for modifying agricultural imple

Question

You are considering making a bid for a contract for modifying agricultural implements for a local distributor. The distributer has requested bids for 10 specifically modified trucks each year for the next 5 years for a total of 50 implements in all. The lowest possible price you could possibly charge will result in a $0 NPV at your required rate of return of 17%. The steel base forms cost $9,200 each, facilities are leased for $31,000 per year and labor and material cost $6,600 per implement. New equipment is $70,000 and after tax salvage is $12,000(1-.39) = $7,320. The net working capital will be $5,000 up front in year 0, and reversed at the end of the project. Assuming straight line depreciation, a marginal tax rate of 39%, and a required rate of return of 16%, how much should you bid per implement? Show work

Explanation / Answer

We need to find the bid per implement such that NPV = 0. Using trial and error method or excel solver, we get at price = $15,620

Here, Depreciation = Investment / Project Life

Cash Flows = Investment + NWC + Net Income + Depreciation + After-tax Salvage Value.

I have used rate of return = 17%. There are two rates quoted here - 16% and 17%, not sure which one is correct.

0 1 2 3 4 5 Investment -70,000 NWC -5,000 5,000 Salvage 7,320 Sales 156200 156200 156200 156200 156200 Steel -92000 -92000 -92000 -92000 -92000 Facilities -31000 -31000 -31000 -31000 -31000 Labor -6600 -6600 -6600 -6600 -6600 Depreciation -14000 -14000 -14000 -14000 -14000 EBT 12600 12600 12600 12600 12600 Tax (39%) -4914 -4914 -4914 -4914 -4914 Net Income 7686 7686 7686 7686 7686 Cash Flows -75,000 21686 21686 21686 21686 34,006 NPV $0.31

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