Calculating a Bid Price [LO3] Romo Enterprises needs someone to supply it with 140,000 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 $940.000 to install the equipment necessary to start production; you’ll
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Fundamentals of Corporate Finance
- 15 UPS is considering the purchase of a electric truck that would cost $150,000 and would last for 5 years. At the end of 5 years, the truck would have a salvage value of $20,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $45,000. The company requires a minimum return of 19% on all investment projects. The net present value of the proposed project is closest to (Ignore income taxes.): PV factor of $1 annuity for 5 years at 19% is 3.058 and PV of $1 over 5 years is 0.419 A. $85,000 B. -$12,390 C. -$4,010 D. $145,990arrow_forward5. Option to Wait Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $435,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $2.8 million. The cost of the machine will decline by $215,000 per year until it reaches $2.155 million, where it will remain. If your required return is 9 percent, should you purchase the machine? If so, when should you purchase it?arrow_forwardYour firm is contemplating the purchase of a new $500,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life and has no salvage value. You will save $210,000 per year in order processing costs, and you will be able to reduce working capital by $75,000. If the tax rate is 30 percent, what is the IRR for this project? 18.82% 20.94% 28.17% Cannot be calculated from the information provided. None of the above.arrow_forward
- Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Plane B has a life of 10 years, will cost $132 million, and will produce net cash flows of $25 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company’s cost of capital is 12%. By how much would the value of the company increase if it accepted the better project (plane)? What is the equivalent annual annuity for each plane?arrow_forward8. Maxmillan Corp is planning to buy a new computer system for $800,000 with a useful life of six years. At the end of six years, the system will have no value. Over the six years the system will save them $240,000 each year for the first three years and $120,000 each year for the last three years. a. What is the NPV of the project if Maxmillan requires a return of 16%? b. What is the IRR for this project? c. At what required rate of return is the project's NPV = 0? d. How are NPV and IRR related? e. At a required rate of return of 16%, is the project acceptable? %3Darrow_forward15. Rick Barr Inc. is considering a new product line that has expected sales of $500,000 per year for each of the next 5 years. New equipment that is required to produce the new product will cost $800,000. The equipment has a useful life of 5 years and an $80,000 salvage value and will be sold at the end of year 5 for its salvage value. Total variable costs of the product line are $230,000 per year, total fixed costs (not including depreciation) will be an additional $100,000 per year and the initial working capital investment, to buy inventory, will be $10,000. The discount rate (interest rate) for the project is 10% and the company's tax rate is 35%. What is the total cash flow of year 5 for the company? A. $250,900 B. $160,900 C. $240,900 D. $256,750 4 12arrow_forward
- Economics A new process for manufacturing lead pencils will have a first cost of $35,000 and annual costs of $17,000. The new process will double their capacity. The extra income expected from the new process is $22,000 per year. (a) What is the no- return payback period for this project? (b) What is the payback period at an interest rate of 10% per year?arrow_forwardMartin Enterprises needs someone to supply it with 141,000 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 $1,810,000 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 $151,000. Your fixed production costs will be $266,000 per year, and your variable production costs should be $8.60 per carton. You also need an initial investment in net working capital of $131,000. If your tax rate is 21 percent and you require a return of 13 percent on your investment, what bid price per carton should you submit? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.arrow_forwardMartin Enterprises needs someone to supply it with 141,000 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 $ 1,810,000 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 $151,000. Your fixed production costs will be $266, 000 per year, and your variable production costs should be $8.60 per carton. You also need an initial investment in net working capital of $131,000. If your tax rate is 21 percent and you require a return of 13 percent on your investment, what bid price per carton should you submit?arrow_forward
- Consider a firm with a contract to sell an asset for $151,000 four years from now. The asset costs $96,000 to produce today. a. Given a relevant discount rate on this asset of 13 percent per year, calculate the profit (or loss) the firm will make on this asset. b. At what rate does the firm just break even? a.arrow_forwardA new electronic process monitor costs $990,000. This cost could be depreciated at 30% per year (Class The monitor would actually be worth $100,000 in five years. The new monitor would save $460,000 per year before taxes and operating costs. Suppose the new monitor requires us to increase net working capital by $47,200 when we buy it. If we require a 15% return, what is the NPV of the purchase? Assume a tax rate of 40%. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)arrow_forwardA company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $108,168,164 now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project’s NPV? 10.6.1 nnarrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning