Question

Your company has been approached to bid on a contract to sell 5,350 volce recognition (VR) computer keyboards a year for four years. Due to technological Improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.2 million and will be depreciated on a stralght- line basis to a zero salvage value. Production will require an Investment In net working capital of $450,000 to be returned at the end of the project, and the equipment can be sold for $415,000 at the end of production. Fixed costs are $625,000 per year, and variable costs are $86 per unit. In addition to the contract, you feel your company can sell 13,600, 15,700, 19,000, and 11,500 additional units to companles In other countries over the next four years, respectively, at a price of $192. This price is fixed. The tax rate Is 21 percent, and the required return is 11 percent. Additionally, the president of the company will undertake the project only If It has an NPV of $125,000. What bid price should you set for the contract?.(Do not round Intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) Bid price

Answer 1

VR	0	1	2	3	4
Unit Sales		13,600	15,700	19,000	11,500
Investment	-$4,200,000
NWC	-$450,000				$450,000
Salvage					$415,000
Sales		$3,568,904	$3,972,104	$4,605,704	$3,165,704
VC		-$1,629,700	-$1,810,300	-$2,094,100	-$1,449,100
FC		-$625,000	-$625,000	-$625,000	-$625,000
Depreciation		-$1,050,000	-$1,050,000	-$1,050,000	-$1,050,000
EBT		$264,204	$486,804	$836,604	$41,604
Tax (21%)		-$55,483	-$102,229	-$175,687	-$8,737
Net Profit		$208,721	$384,575	$660,917	$32,867
Cash Flows	-$4,650,000	$1,258,721	$1,434,575	$1,710,917	$1,860,717
NPV	$125,035.09

We need to find bid price such that NPV of the project is $125,000 using trial and error method.

We get bid price = $179.01, NPV = $125,000

Sales year 1 = 13,600 x 192 + 5,350 x 179.01 = $3,568,904 and so on...

Cash Flows = Investment + NWC + Salvage x (1 - tax) + Net Profit + Depreciation