Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service for

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Consider a project to supply 60 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 $750,000 five years ago; if the land were sold today, it would net you $900,000. You will need to install $2.4 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 $400,000 at the end of the project. You will also need $600,000 in initial net working capital for the project, and an additional investment of $50,000 in every year thereafter. Your production costs are 0.6 cents per stamp, and you have fixed costs of $600,000 per year. If your tax rate is 34 percent and your required return on this project is 15 percent, what bid price should you submit on the contract?

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Fundamentals Of Corporate Finance

ISBN: 9780072553079

6th Edition

Authors: Stephen A. Ross, Randolph Westerfield, Bradford D. Jordan

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