Question

Consider a project to supply 90 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 $1,655,000 five years ago; if the land were sold today, it would net you $1,730,000 aftertax. The land can be sold for $1,738,000 after taxes in five years. You will need to install $4.85 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 $475,000 at the end of the project. You will also need $525,000 in initial net working capital for the project, and an additional investment of $40,000 in every year thereafter. Your production costs are .38 cents per stamp, and you have fixed costs of $950,000 per year. If your tax rate is 21 percent and your required return on this project is 8 percent, what bid price should you submit on the contract?

Answer 1

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