Your company has been approached to bid on a contract to sell 24,000 voice recognition (VR) computer

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Your company has been approached to bid on a contract to sell 24,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.4 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $150,000 to be returned at the end of the project and the equipment can be sold for $350,000 at the end of production. Fixed costs are $625,000 per year, and variable costs are $160 per unit. In addition to the contract, you feel your company can sell 4,400, 7,900, 9,700, and 5,900 additional units to companies in other countries over the next four years, respectively, at a price of $240. This price is fixed. The tax rate is 40 percent, and the required return is 13 percent. Additionally, the president of the company will only undertake the project if it has an NPV of $100,000. What bid price should you set for the contract?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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Corporate Finance Core Principles and Applications

ISBN: 978-0077905200

3rd edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford

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