Question

quick access, place your bookmarks here on the bookmarks bar. Import bookmarks now... : Capital Investment Decisions i OYou skippe Your company has been approached to bid on a contract to sell 24,000 voice recognition (VR) computer keyboards per 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 Due to technological improvements, beyond that time they will be outdated and no sales will be possible.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 $5,200,000 and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $200,000 to be returned at the end of the project, and the equipment can be sold for $320,000 at the end of production. Fixed costs are $855,000 per year and variable costs are $45 per unit. In add ition to the contract, you feel your company can sell 5,800, 13,400, 15,400, and 8,700 additional units to companies in other countries over the next four years, respectively, at a price of $140. This price is fixed. The tax rate is 25 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $150,000 What bid price should you set for the contract? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Bid price

Answer 1

Let bid price be P

NPV>=150000

-5200000-200000+200000/1.12^4+320000*(1-25%)/1.12^4+((24000*P+5800*140-(24000+5800)*45-855000-5200000/4)*(1-25%)+5200000/4)/1.12+((24000*P+13400*140-(24000+13400)*45-855000-5200000/4)*(1-25%)+5200000/4)/1.12^2+((24000*P+15400*140-(24000+15400)*45-855000-5200000/4)*(1-25%)+5200000/4)/1.12^3+((24000*P+8700*140-(24000+8700)*45-855000-5200000/4)*(1-25%)+5200000/4)/1.12^4>=150000

=>P>=116.807806