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 150,000 cartons of machine screws per year to support its manufacturing needs over the next 5 years, and you have decided to bid on the contract. It will cost you €780,000 to install the equipment necessary to start production;

you will depreciate this cost using 20 per cent reducing balances over the project’s life. You estimate that in 5 years this equipment can be salvaged for €50,000. Your fixed production costs will be €240,000 per year, and your variable production costs should be €8.50 per carton. You also need an initial investment in net working capital of €75,000. If your tax rate is 35 per cent and you require a 16 per cent return on your investment, what bid price should you submit?