We have been requested by a large retailer to submit a bid for a new point-of-sale credit checking system. The system would be installed, by us, in 89 stores per year for three years. We would need to purchase $1,300,000 worth of specialized equipment. This will be depreciated at a 20 percent CCA rate. We will sell it in three years, at which time it will be worth about half of what we paid for it. Labour and material cost to install the system is about $96,000 per site. Finally, we need to invest $340,000 in working capital items. The relevant tax rate is 36 percent. What price per system should we bid if we require a 20 percent return on our investment? Try to avoid the winner's curse. Inputs Quantity Ordered Price per Unit Variable Cost per Unit Initial Equipment Outlay CCA Rate Salvage Value Initial Working capital Required rate Tax rate Number of Years 89 Find Price $96.000.000 $1,300,000 20% 650,000 $340,000 20% 3696 Bid Price is the price at which NPV = 0 NPV = 0= Initial Outlay - IWC - +PVCCATS + PVOCF + PVTNOCF Initial Outlay Initial Working capital PVCCATS = [1dt/(d+r)*(1 +0.50)/(1+r)] - [Sdt/(d+r) (1/(1+r)^n PV of Terminal Non Operating CF Total Revenue Needed for NPV to be Zero Annual Revenue Required (P-V)Q- FC (1-1) Solve for p Calculate NPV to check your answer and be sure it's close to zero it may not be exatly zero due to rounding)