Calculating a Bid Price Consider a project to supply 100 million postage stamps per year to the

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Calculating a Bid Price Consider a project to supply 100 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 $1,000,000 five years ago; if the land were sold today, it would net you $1,200,000 after tax. The land can be sold for $1,500,000 after taxes in five years. You will need to install $3.8 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 $650,000 at the end of the project. You will also need $500,000 in initial net working capital for the project, and an additional investment of $50,000 in every year thereafter. Your production costs are 0.5 cents per stamp, and you have fixed costs of $900,000 per year. If your tax rate is 34 percent and your required return on this project is 12 percent, what bid price should you submit on the contract?

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Fundamentals of Corporate Finance

ISBN: 978-0077861629

8th Edition

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

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