Question

Your company has been approached to bid on a contract to sell 5,600 voice 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 Due to technological improvements, beyond that time they will be outdated and no sales will be possible.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 $4.7 million and will be depreciated on a straight- line basis to a zero salvage value. Production will require an investment in net working capital of $475,000 to be returned at the end of the project, and the equipment can be sold for $465,000 at the end of production. Fixed costs are $650,000 per year, and variable costs are $91 per unit. In addition to the contract, you feel your company can sell 14.600, 16,700, 19,500, and 12,000 additional units to companies in other countries over the next four years, respectively, at a price of $202. This price is fixed. The tax rate is 21 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. 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 19 of 19 !!!

Answer 1

T ? c3 - X fix =SUM(Q2:07) A B C D E G H I J K L M N O P Q Contribu Net Sales Variab tion per Fixed Depreciati Depreciati working Operating Total cash PVIF@ Present 1 Year units Sale price le cost unit costs on | PBT Tax@21% PAT on capital cash flows Investment flows 12% value 2 0 (475,000) (4,700,000) (5,175,000) 1.000-$5,175,000 3 1 14,600 $ 229.54 91 139 650,000 1,175,000 197,704 41,518 | 156,186 1,175,000 1,331,186 1,331,186 0.893 $1,188,559 4 2 16,700 $ 229.54 91 139 650,000 1,175,000 488,641 | 102,615 386,026 1,175,000 1,561,026 1,561,026 0.797 $1,244,441 5 31 19.500 $ 229.54 | 91 | 139 650,000 1,175,000 876,557 184,077 | 692,480 1,175,000 1,867,480 1,867,480 0.712 $1,329,235 6 4 12,000 $ 229.54 91 | 139 650,000 1,175,000 (162,504) (34,126) (128,378) 1,175,000 475,000 1,046,622 338,200 1,859,822 0.636 $1,181,951 U * 1 Nm to 00 R S Goal Seek Set cell: 08 To value: 100000 By changing cell: $C$3| D OK Cancel Target NPV -$230,815

R S T U Goal Seek Status 08 .: X fi =SUM(Q2:Q7) A B C D E F G Contribu Sales Variab tion per Fixed Depreciati 1 Year units Sale price le cost unit costs on 2 0 3 1 14,600 $ 238.29 91 147650,000 1,175,000 4 2 16,700 $ 238.29 91 147650,000 1,175,000 5 3 19,500 $ 238.29 147 650,000 1,175,000 6 4 12,000 $238.29 91 147 650,000 1,175,000 PBT on H I J K L M N O P Q Net Depreciati working Operating Total cash PVIF@ Present Tax@21% PAT capital cash flows Investment flows 12% value (475,000) (4,700,000) (5,175,000) 1.000|-$5,175,000 325,461 68,347 257,114 1,175,000 1,432,114 1,432,114 0.893 $1,278,673 634,774 | 133,303 501,471 1,175,000 1,676,471 1,676,471 0.797 $1,336,473 ####### 219,910 827,281 | 1,175,000 2,002,281 2,002,281 0.712 $1,425,184 (57,498) (12,075) (45,423) 1,175,000 475,000 1,129,577 338,200 1,942,777 0.636 $1,234,670 Goal Seeking with Cell 08 found a solution. Step Pause Target value: 100000 Current value: $100,000 ок | Cancel 8 Target NPV $100,000

Hence, Bid price is $238.29

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