Problem 13: Making Capital Investment Decisions (5 points) Heer Enterprises needs someone to supply it with...

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Problem 13: Making Capital Investment Decisions (5 points) Heer Enterprises needs someone to supply it with 130,000 cartons of machine screws per year to support its manufacturing needs over the next four years, and you've decided to bid on the contract. It will cost you $765,000 to install the equipment necessary to start production; this equipment is classified as a five- year MACRS property for tax purposes. You estimate that in four years, this equipment can be salvaged for $100,000 (i.e., you can sell it at the end of Year 4 for $100,000). Your fixed production costs will be $180,000 per year in the first two years and $200,000 per year in the last two years. Your variable production costs should be $8.20 per carton throughout the project. You also need an initial investment in net working capital of $59,500 and an additional investment of $1,500 in every year thereafter. All new working capital will be recovered when the project ends. Your tax rate is 22 percent and you require a return of 14.5 percent. What bid price per carton should you submit? The MACRS depreciation schedules are as follows: Year 1 2 3 4 5 6 7 8 Three-Year 33.33% 44.45 14.81 7.41 Five-Year 20.00% 32.00 19.20 11.52 11.52 5.76 Seven-Year 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46 Problem 13: Making Capital Investment Decisions (5 points) Heer Enterprises needs someone to supply it with 130,000 cartons of machine screws per year to support its manufacturing needs over the next four years, and you've decided to bid on the contract. It will cost you $765,000 to install the equipment necessary to start production; this equipment is classified as a five- year MACRS property for tax purposes. You estimate that in four years, this equipment can be salvaged for $100,000 (i.e., you can sell it at the end of Year 4 for $100,000). Your fixed production costs will be $180,000 per year in the first two years and $200,000 per year in the last two years. Your variable production costs should be $8.20 per carton throughout the project. You also need an initial investment in net working capital of $59,500 and an additional investment of $1,500 in every year thereafter. All new working capital will be recovered when the project ends. Your tax rate is 22 percent and you require a return of 14.5 percent. What bid price per carton should you submit? The MACRS depreciation schedules are as follows: Year 1 2 3 4 5 6 7 8 Three-Year 33.33% 44.45 14.81 7.41 Five-Year 20.00% 32.00 19.20 11.52 11.52 5.76 Seven-Year 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46