Imagine we are in the business of buying stripped-down truck platforms and then modifying them to customer
Question:
Imagine we are in the business of buying stripped-down truck platforms and then modifying them to customer specifications for resale. A local distributor has requested bids for five specially modified trucks each year for the next 4 years, for a total of 20 trucks in all. We need to decide what price per truck to bid. The goal of our analysis is to determine the lowest price we can profitably charge. This maximizes our chances of being awarded the contract while guarding against the winner’s curse. Suppose we can buy the truck platforms for €10,000 each. The facilities we need can be leased for €24,000 per year. The labor and material cost to do the modification works out to be about €4,000 per truck. We need to invest €60,000 in new equipment. For simplicity, this equipment will be depreciated straight-line to a zero over the 4 years. It will be worth about €5,000 at the end of that time. We shall also need to invest €40,000 in raw materials inventory and other working capital items. The relevant tax rate is 39 percent. What price per truck should we bid if we require a 20 percent return on our investment?
Quantitative Methods for Business
ISBN: 978-0324651751
11th Edition
Authors: David Anderson, Dennis Sweeney, Thomas Williams, Jeffrey cam