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 $26.80, what is the NPV of this project? (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.

Flanders Enterprises needs someone to supply it with 129,000 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 $930,000 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 $97,000. Your fixed production costs will be $505,000 per year, and your variable production costs should be $17.75 per carton. You also need an initial investment in net working capital of $98,000. Assume your tax rate is 24 percent and you require a return of 10 percent on your investment.    a.

Assuming that the price per carton is $26.80, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b. Assuming that the price per carton is $26.80, find the quantity of cartons per year you can supply and still break even. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
c. Assuming that the price per carton is $26.80, 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. NPV ? b. Break-even number of cartons ? c. Break-even fixed costs ?

Explanation / Answer

Question - a

Contribution per unit = Selling price - variable cost = 26.80 - 17.75 = 9.05 per unit

Total contribution = 129000 Units * 9.05 = 1167450

Annual cash flows are calculated as follows

CALCULATION OF NPV

At year = 0, we see the total investment should be 930000 + 98000 = 1028000

In year - 5, salvage value of asset = 97000. But in 5 years asset is depreciated to zero ( as given in question). So total 97000 will be a profit and tax of 24% is applicable. Thus salvage received net of tax = 97000 * ( 1 - 0.24) = 73720. Total cash inflow = 73720 + 98000 ( i.e recovery of working capital) = 171720.

Required - b

Break - even number of cartons.

= Fixed cost / ( contribution per cartons) = 505,000 / 9.05 = 55801.cartons

Required - c

Maximum fixed cost = Current total contribution = 129000 * 9.05 = 1,167,450

Total contribution 1167450 (-) Fixed cost 505000 (-) Depreciation 186000 Earnings before tax 476450 (-) Tax 114348 Earnings after tax 362102 (+) Depreciation 186000 Annual cash flow 548102

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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