To solve the bid price problem presented in the text, we set the project NPV equ

Question

To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems.

Romo Enterprises needs someone to supply it with 116,000 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 $830,000 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 $66,000. Your fixed production costs will be $321,000 per year, and your variable production costs should be $9.90 per carton. You also need an initial investment in net working capital of $71,000. Assume your tax rate is 34 percent and you require a 10 percent return on your investment.

Assuming that the price per carton is $16.60, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

  

Assuming that the price per carton is $16.60, find the quantity of cartons per year you need to supply to break even. (Do not round intermediate calculations and round your answer to nearest whole number.)

Quantity of cartons _____

Assuming that the price per carton is $16.60, find the highest level of fixed costs you could afford each year and still break even. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a.

Assuming that the price per carton is $16.60, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Requirement b:

Selling Price = $16.6

Variable Cost = $9.9

Contribution = 16.6-9.9 = $6.7

Breakeven cartons = Fixed Costs / Contribution per carton

= $321000 / 6.7

= 47910.447

Breakeven cartons = 47911

Requirement a: Intial Investment 830000+71000 901000 Recurring Cash Flows Sales 116000*16.6 1925600 Less: Variable Cost 116000*9.9 1148400 Contribution 777200 Less: Fixed Costs 321000 Profit 456200 Less: Taxes (34%) 155108 Profit aftert tax 301092 Add: Depreciation 830000/5 166000 Cash flow after tax 467092 Terminal Cash Flow Salvage Value 66000 Less: Taxes 22440 Salvage Value after tax 43560 Calculation of NPV: Year Cash Flow PVF (10%) PV of Cash Flow 0 -901000 1 -901000 1 to 5 467092 3.790787 1770646.281 5 43560 0.62092132 27047.3327 896693.6141 NPV $896,693.61

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