7. value: 10.00 points Your company has been approached to bid on a contract to

Question

7. value: 10.00 points Your company has been approached to bid on a contract to sell 5,200 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.8 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $105,000 to be returned at the end of the project, and the equipment can be sold for $285,000 at the end of production. Fixed costs are $650,000 per year, and variable costs are $165 per unit. In addition to the contract, you feel your company can sell 10,500, 11,400, 13,500, and 10,800 additional units to companies in other countries over the next four years, respectively, at a price of $360. This price is fixed. The tax rate is 30 percent, and the required return is 13 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

At bid-price of $204.95, we get NPV = $100,000.

0 1 2 3 4 Unit 10500 11400 13500 10800 Investment -$    4,800,000 NWC -$       105,000 $    105,000 Salvage $    285,000 Sales $ 4,845,740 $   5,169,740 $ 5,925,740 $ 4,953,740 VC -$ 2,590,500 -$   2,739,000 -$ 3,085,500 -$2,640,000 FC -$    650,000 -$      650,000 -$     650,000 -$   650,000 Depreciation -$ 1,200,000 -$   1,200,000 -$ 1,200,000 -$1,200,000 EBT $    405,240 $      580,740 $     990,240 $    463,740 Tax (30%) -$    121,572 -$      174,222 -$     297,072 -$   139,122 Profits $    283,668 $      406,518 $     693,168 $    324,618 Cash Flows -$    4,905,000 $ 1,483,668 $   1,606,518 $ 1,893,168 $ 1,829,118 NPV $   100,012.49

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.