Question: Another utilization of cash flow analysis is setting the bid
Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus, the bid price represents a financial break-even level for the project. Guthrie Enterprises needs someone to supply it with 200,000 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 $1,300,000 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 $150,000. Your fixed production costs will be $330,000 per year, and your variable production costs should be $10.40 per carton. You also need an initial investment in net working capital of $175,000. If your tax rate is 35 percent and you require a 13 percent return on your investment, what bid price should you submit?
Answer to relevant QuestionsThe technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price, that is, set the project NPV to zero and solve for ...The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. BICC plans to breed toads and sell them as ecologically desirable insect control mechanisms. They ...Consider a four-year project with the following information: initial fixed asset investment = $430,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $29; variable costs = $18; fixed ...In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $425,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you ...
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