Guthrie Enterprises needs someone to supply it with 145,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost you $1,850,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that in five years, this equipment can be salvaged for $155,000. Your fixed production costs will be $270,000 per year, and your variable production costs should be $9.00 per carton. You also need an initial investment in net working capital of $135,000. If your tax rate is 25 percent and you require a return of 11 percent on your investment, what bid price per carton should you submit? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Bid price
Guthrie Enterprises needs someone to supply it with 145,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost you $1,850,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that in five years, this equipment can be salvaged for $155,000. Your fixed production costs will be $270,000 per year, and your variable production costs should be $9.00 per carton. You also need an initial investment in net working capital of $135,000. If your tax rate is 25 percent and you require a return of 11 percent on your investment, what bid price per carton should you submit? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Bid price
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Guthrie Enterprises needs someone to supply it with 145,000 cartons of machine screws
per year to support its manufacturing needs over the next five years, and you've decided
to bid on the contract. It will cost you $1,850,000 to install the equipment necessary to
start production; you'll depreciate this cost straight-line to zero over the project's life. You
estimate that in five years, this equipment can be salvaged for $155,000. Your fixed
production costs will be $270,000 per year, and your variable production costs should
be $9.00 per carton. You also need an initial investment in net working capital of
$135,000. If your tax rate is 25 percent and you require a return of 11 percent on your
investment, what bid price per carton should you submit? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
Bid price
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VIEWStep 1: The depreciation tax shield is as follows:
VIEWStep 2: The after-tax salvage value is as follows:
VIEWStep 3: Calculate the net income as follows:
VIEWStep 4: Calculate the present value of annual operating cash flow as follows:
VIEWStep 5: Calculate the bid price as follows:
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