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.

  

Assuming that the price per carton is $17.20, 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 $17.20, 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.)

  

  

Assuming that the price per carton is $17.20, 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.)

  

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 122,000 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 $890,000 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 $72,000. Your fixed production costs will be $327,000 per year, and your variable production costs should be $10.50 per carton. You also need an initial investment in net working capital of $77,000. Assume your tax rate is 34 percent and you require a 10 percent return on your investment.

Explanation / Answer

Sales = 17.20 x 122,000 = 2,098,400

VC = 10.5 x 122,000 = 1,281,000

Depreciation = 890,000 / 5 = 178,000

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

NPV can be calculated using NPV function in excel with 10% rate.

NPV = NPV(10%, 384184...508704) - 967000 = $566,676.75

b) Now, in order to break even NPV should be equal to zero. We get break-even quantity = 88,195 cartons using trial and error method at which NPV = 0

c) Similarly, using trial and error method, the break-even fixed cost = $553,496.81

Romo 0 1 2 3 4 5 Investment -$890,000 NWC -$77,000 $77,000 Salvage $72,000 Sales $2,098,400 $2,098,400 $2,098,400 $2,098,400 $2,098,400 VC -$1,281,000 -$1,281,000 -$1,281,000 -$1,281,000 -$1,281,000 FC -$327,000 -$327,000 -$327,000 -$327,000 -$327,000 Depreciation -$178,000 -$178,000 -$178,000 -$178,000 -$178,000 EBT $312,400 $312,400 $312,400 $312,400 $312,400 Tax (34%) -$106,216 -$106,216 -$106,216 -$106,216 -$106,216 Net Profits $206,184 $206,184 $206,184 $206,184 $206,184 Cash Flows -$967,000 $384,184 $384,184 $384,184 $384,184 $508,704 NPV $566,676.75

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