Question

32. Calculating a Bid Price Guthrie Enterprises needs someone to supply it with 175,000 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 $1,800,000 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 $160,000. Your fixed production costs will be $265,000 per year, and your variable production costs should be $13.25 per carton. You also need an initial investment in net working capital of $175,000. If your tax rate is 35 percent and you require a return of 13 percent on your investment, what bid price should you submit?

Answer 1

Solution: units 175000 Project life 5 Years 1800000 360000 160000 Equipment cost Depreciation 1800000/5 Sale value FC 265000 VC 13.25 initial investment in net working capital 175000 35% Tax rate 13% Required return *factor working PVIFA(R%,n) PVIFA(13%,5) Initial investment=(((SP-VC)*Q-FC-Dep)*(1-t)+Dep) * PVIFA(R%,n)+SV*(1-t)* PVIF(R%, n) + NWC*PVIF(R%,n) Let 'a' be the bid price. 1800000+175000=((((a-13.25)*175000-265000-360000)*(1-0.35))+360000)*3.51723126+160000*0.54275994+175000*0.54275994 1975000=(((175000a-2318750-625000)*0.65)+360000)*3.51723126+56447.03+94982.99 1975000=(113750a-1913437.5+360000)*3.51723126+151430.02 1975000 (113750a-1553437.5)*3.51723126+151430.02 |(1-(1+r)^-n)/r (1-(1.13A-5))/0.13 3.5172313 | 1/(1+r)An 1/(1.13A5) PVIF(R%,n) PVIF(13%,5) 0.5427599 1975000-400085.06a-5463798.94+151430.02 1975000 400085.06a-5312368.92 Sale price variable cost SP 400085.06a-1975000+5312368.92 400085.06a-7287368.92 VC FC Dep SV a 18.21 Fixed cost Depreciation Sale value Sheet4 Sheet5 Sheet1 Sheet2 Sheet3 ENG 22:24 03/11/2019 US