To solve the bid price problem presented in the text, we set the project NPV equ
ID: 2794114 • Letter: T
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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 112,000 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 $790,000 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 $62,000. Your fixed production costs will be $317,000 per year, and your variable production costs should be $9.50 per carton. You also need an initial investment in net working capital of $67,000. Assume your tax rate is 35 percent and you require a 12 percent return on your investment a. Assuming that the price per carton is $16.20, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV b. Assuming that the price per carton is $16.20, 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.) Quantity of cartons c. Assuming that the price per carton is $16.20, 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.) Fixed costsExplanation / Answer
Depreciation of the machine =Cost of the machine / Life of the machine.
=$790,000/5
=$158,000.
Answer for question no.1:
NPV= Present value of cash inflows - Present value of cash outflows
Present value of cash outflows= Cost of machine+Net working capital
=$790,000+$67,000
=$857,000.
Present value of cash inflows:
NPV=$1,293,163.23 - $857,000.
=$436,163.23.
Answer for question no.b:
Contribution earned per carton as calculated above=$6.7
Total fixed costs=Fixed manufacturing costs+Depreciation
=$317,000+$158,000
=$475,000.
Breakeven point in cartons=Fixed costs/Contribution per carton
=$475,000./$6.7
=70,895.52 rounded to 70,896.
Answer for question no.c:
Highest level of fixed costs that could be afforded = Operating profit + current fixed expenses
=$275,400+$475,000.
=$750,400.
Particulars Amount Calculation Price per carton 16.2 Variable cost per carton 9.5 Contribution per carton 6.7 Number of cartons 112000 Contribution earned 750400 112000*6.7 Minus: Fixed costs 317000 Minus: Depreciation 158000 Operating profit 275400 Tax @35% 96390 275400*35% Profit after tax 179010 Add: Depreciation 158000 Cash flow 337010 Present value annuity factor@12% 3.6047762 (1-(1+.12)^-5)/.12 Present value of operating cash inflows 1214845.63 3.60477*337010 Add:Present value of salvage value after tax 40300 62000*(1-0.35), since the machine deprecitiated to zero, the entire amount to be treated as gain Add:Present value of working capital recovered 38017.5993 67000/1.12^5 Present value of cash inflows 1293163.23Related Questions
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