
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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need answer in step by step

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
Expert Solution
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Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step 1: Key information that is required from the question:
VIEW Step 1: The depreciation tax shield is as follows:
VIEW Step 2: The after-tax salvage value is as follows:
VIEW Step 3: Calculate the net income as follows:
VIEW Step 4: Calculate the present value of annual operating cash flow as follows:
VIEW Step 5: Calculate the bid price as follows:
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