Question

Problem 8-32 Calculating a Bid Price Guthrie Enterprises needs someone to supply it with 158,000 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 $1,980,000 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 $168,000. Your fixed production costs will be $283,000 per year, and your variable production costs should be $10.30 per carton. You also need an initial investment in net working capital of $148,000. If your tax rate is 34 percent and you require a return of 12 percent on your investment, what bid price per carton should you submit? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Bid price $

Answer 1

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Carton Investment -$1980,000 1 2 3 4 5 -$148,000 A NWc $148000 Salvage sales 2250898 $ 12350898 2350888 1350898 2350898 2350898 Costs - $ - $ 200 11722 200 17222001722200 [1722 200 1722200 -$ -$ -4 -$ -$ -$ Depreciation 396000 396000 396000 356000 396000 $ $ EBT 14 | 232698 232 698 232 698 232 698 232698 - 6 -$ -$ -$ Tapes (347) 79112 79117 79117 79117 79117 $ Net Income $ $ $ 153,581 153, 581 153,581 153,581 153,58) -$ Cash flows (2128000 84958) $ $ 4 54958) SU 582 1549 581 54958) NPV + 209 $ fuq se $4958) $ $0 C Scanned with CamScanner

Cash flows =Net income +Depreciation

We need to find the price such that NPV =0

Using trial and error method,we get a price of $14.88,we get NPV =0.Hence our bid price should be $14.88

Thank you