## Question

# Finding the Maximum Bid for a Capital Asset. Some of you will end up in positions where you negotiate prices for your firm. A useful

Finding the "Maximum Bid" for a Capital Asset. Some of you will end up in positions where you negotiate prices for your firm. A useful tool to know is your price ceiling in negotiating a deal. In other words, what is the highest price you can pay for a fixed asset; using our course concepts, the highest price is the bid that allows the project to break-even. A local pizzeria wants to add a gelato freezer to their business. The manager feels that the freezer will allow them to sell $11,000 of gelato per year, with $7,000 in operating expenses associated with the product and operating the freezer and the firm wants to evaluate the project over 9 years. The freezer will be straight-line depreciated to zero over 9 years and is not expected to have any salvage value at that time. The tax rate facing the firm is 38.6%, while the cost of capital is 10%. Find the Maximum Bid for the gelato freezer

\begin{tabular}{|c|c|c|c|c|c|c|c|c|c|} \hline \multicolumn{10}{|c|}{ Discount rate } \\ \hline \multicolumn{10}{|l|}{ Tax rate } \\ \hline Sales & $11,000 & & & & & & & & \\ \hline Expenses & $7,000 & & & & & & & & \\ \hline \multicolumn{10}{|c|}{ Maximum bid } \\ \hline Year & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & 9 \\ \hline Sales & $11,000 & $11,000 & $11,000 & $11,000 & $11,000 & $11,000 & $11,000 & $11,000 & $11,000 \\ \hline Expenses & $7,000 & $7,000 & $7,000 & $7,000 & $7,000 & $7,000 & $7,000 & $7,000 & $7,000 \\ \hline \multicolumn{10}{|c|}{ Depreciation } \\ \hline \multicolumn{10}{|l|}{ EBIT } \\ \hline \multicolumn{10}{|l|}{ NOPAT } \\ \hline \multicolumn{10}{|c|}{ Depreciation } \\ \hline \multicolumn{10}{|c|}{ Project cash flow } \\ \hline Project NP & & & & & & & & & \\ \hline \end{tabular}

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