Question

Romo Enterprises needs someone to supply it with 113,000 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 $800,000 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 $63,000. Your fixed production costs will be $318,000 per year, and your variable production costs should be $9.60 per carton. You also need an initial investment in net working capital of $68,000. If your tax rate is 34 percent and you require a return of 10 percent on your investment, what bid price should you submit? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The minimum bid price for the acceptance of the order (for 5 years) = $4,119,672.72

Intal ortlays Euipments uooting captal CFO 4 800,000 $6 8,000 $868,000 out 1 to 4 Cash flow Aom yeas Taex sheid due teadeprecatrm Ata tax ined+ a tax vaniabe COST Cost 8రారా00- 63,రాం) 318000 (1-0-34) + 9-6 x I1, 000 (1-0-34) 11 CF, to CF4 $875,732 D Cash out tow inyeas 5:- Afto tax Salvay e 1 ww0eing capial elere 85 32-630001- -0-34 68,000 C Fs $466,152 Tue Bid to be valuce af 1nenpresent 45 all he Cash Anw CFn (I-10) 411 9,648.42