Question

Consider a project to supply 95 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,680,000 five years ago, if the land were sold today, it would net you $1,755,000 aftertax. The land can be sold for $1,743,000 after taxes in five years. You will need to install $51 million in new manufacturing plant and equipment to actually produce the stamps, this plant and equipment will be depreciated straight-line to zero over the project's five-year life. The equipment can be sold for $550,000 at the end of the project. You will also need $550,000 in initial net working capital for the project, and an additional investment of $45,000 in every year thereafter. Your production costs are 43 cents per stamp, and you have fixed costs of $1,000,000 per year. If your tax rate is 21 percent and your required return on this project is 9 percent, what bid price should you submit on the contract? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.) Bid price 13 of 19 h Next

Answer 1

A В 1 Relavant cost of land $ (1,755,000) 2 New plant and machinery $ (5,100,000) 3 Change in working capital (550,000) 4 5 Initial cash flows (7,405,000) ..(1) 6 7 Change in working capital 8 Add: After tax cash flows from sale of land 9 Add: After tax cash flows from sale of equipment 10 Year 5 non operating cash inflows 11 PVIF (9%,5) $ 730,000 1,743,000 -550000* (1-21%) $ 434,500 2,907,500 0.650 12 Present value of year 5 non operating cash flows (2) 1,889,676 13 14 Total PV of operatng cash flows required [(1)+(2)]x-1 $ 5,515,324 15 Add: PV of annual additional NWC per year 145,787 =PV(9%,4,-45000,,) 16 Total annual cash flows required 17 PVIFA(9%,5) $ 5,661,112 3.890 18 Equivalent annua operating cash flows 1,455,429 19 [Total PV of operatng cash flows required+PVIFA(9%,5)] 20 Less: Depreciation per annum 21 Increase in net income after taxes $ 1,020,000 $ 435,429 $ 22 Add: Tax payable on increased net income before taxes 115,747 23 Increase in net income before taxes 24 Add: Depreciation per annum 25 Add: Annual cash costs 26 Total bid price for 95,000,000 stamps $ 551,176 $ 1,020,000 1,408,500 95000000*0.0043+1000000 2,979,676 $0.03137 27 Bid price per stamp

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