Question

Your company has been approached to bid on a contract to sell 5,500 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 Due to technological improvements, beyond that time they will be outdated and no sales will be possible.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 $4.5 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 $465,000 to be returned at the end of the project, and the equipment can be sold for $445,000 at the end of production. Fixed costs are $640,000 per year, and variable costs are $89 per unit. In addition to the contract, you feel your company can sell 14,200, 16,300, 19,300, and 11,800 additional units to companies in other countries over the next four years, respectively, at a price of $198. This price is fixed. The tax rate is 24 percent, and the required return is 10 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

c3 for G H I J : x =SUM(Q2:07) A B C D E F Contributi Sales Variab on per Fixed 1 Year units Sale price le cost unit costs 2 0 3 1 14,200 $ 250.00 89 161 640,000 4 2 16,300 $ 250.00 8 9 161 640,000 5 3 19,300 $ 250.00 89 161 640,000 6 4 11,800 $ 250.00 8 9 161 640,000 Depreciati on PBT Tax@24% PAT on K L M N O P Q Net Depreciati working Operating Total cash PVIF@ capital cash flows Investment flows 10% Present value (465,000) (4,500,000) (4,965,000) 1.000 -$4,965,000 1,125,000 1,521,112 1,521,112 0.909 $1,382,829 1,125,000 1,778,068 1,778,068 0.826 $1,469,478 1,125,000 2,145,148 | 2,145,148 0.751 $1,611,681 1,125,000 465,000 1,227,448 3 38,200 2,030,648 0.683 $1,386,960 ་་ ལ་ ལ བ 1,125,000 1,125,000 1,125,000 1,125,000 521,200 859,300 1,342,300 134,800 125,088 206,232 322,152 32,352 396,112 653,068 1,020,148 102,448 །། Target NPV $885,948! Goal Seek Х Set cell: To value: By changing cell: D OK 08 125000 $C$3] 16 Cancel

Q8 H I J K L M N O P Q Net Sales X ✓ fx =SUM(Q2:07) A B C D E F G Contributi Variab on per Fixed Depreciati 1 Year units Sale price le cost unit costs on 2 0 1 14,200 $ 229.54 89 141 640,000 1,125,000 2 16,300 $ 229.54 89 141 640,000 1,125,000 3 19,300 $ 229.54 89 141 640,000 1,125,000 4 11,800 $ 229.54 89 141 640,000 1,125,000 Depreciati working Operating Total cash PVIF@ PBT Tax@24% PAT on capital cash flows Investment flows 10% Present value (465,000) (4,500,000) (4,965,000) 1.000 $4,965,000 230,687 55,365 175,322 1,125,000 1,300,322 1,300,322 0.909 $1,182,111 525,824 126,198 399,626 1,125,000 1,524,626 1,524,626 0.826 $1,260,022 947,448 227,388 720,061 1,125,000 1,845,061 1,845,061 0.751 $1,386,221 (106,612) (25,587) (81,025) 1,125,000 465,000 1,043,975 338,200 1,847,175 0.683 $1,261,645 5 6 7 8 Target NPV $125,000 Goal Seek Status ? X Goal Seeking with Cell 08 found a solution. Step Pause 14 Target value: 125000 Current value: $125,000 OK Cancel

Hence, Bid price is $229.54

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