Question

United Technology needs someone to supply it with 100,000 units of a part per year to support its manufacturing needs over the next 3 years, and you have decided to bid on the contract. It will cost you $1.5 million to install the equipment necessary to start production. The equipment cost will be depreciated over straight-line to zero over the projects life. In three years, the equipment can be sold for $400,000. Fixed production costs will be $700,000 per year. Variable production costs will be $8 per unit. An initial investment in net working capital of $200,000 will be required. If your tax rate is 25% and you require a 10% return on your investment what is the lowest price you should bid per unit of this part?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

00:39 W ? v 1 ENG 27-02-2020 22 1R727 IL IM IN 10 P Q IR IS IT IU IVA 716 717 718 BID PRICE AT NPV =0 [(units (sp-vc) - fc-depreciation)(1-t) + depreciation) x PVIFA @ 10% 3 YEARS + (RECOVERY OF WORKING CAPITAL + AFTER TAX SALVAGE VALUE) X PVIF @10% 3 YEARS = COST OF EQUIPMENT + WORKING CAPITAL 719 722 {[100000 (X-8) -700000-500000]*(1-0.25) + 500000 } X PVIFA @ 10% 3 YEARS + (200000+400000(1-0.25)) X PVIF @10%, 3 YEARS = 1500000 + 200000 {[100000 (X-8) -700000-500000]*(1-0.25) + 500000 } X 2.486852 + (200000+400000(1-0.25)) X 0.751315 = 1500000 + 200000 186513.90(X) -2486852 + 375657.50 = 1700000 186513.90(X) = 3811194.5 X = 20.433836 X = 20.43 725 727 728 ANSWER: BID PRICE = 20.43 729 730 731 NOTE PVIFA @10%, 3 YEARS PVIF @10%, 3 YEARS 2.486852 (18r)*(1-(1/(1+r)^n)) 0.751315 (1/(1+r)^n) 733 734 NOTE DEPRECIATION PER YEAR = 1500000/3 = 500000 735 736 737 738 739 ... NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRS HAMADA pretax Sheet4 Sheet: ... ►