Consider a project to supply 102 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,715,000 five years ago; if the land were sold today, it would net you $1,790,000 aftertax. The land can be sold for $1,750,000 after taxes in five years. You will need to install $5.45 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's five-year life. The equipment can be sold for $655,000 at the end of the project. You will also need $585,000 in initial net working capital for the project, and an additional investment of $52,000 in every year thereafter. Your production costs are .50 cents per stamp, and you have fixed costs of $1,070,000 per year. If your tax rate is 23 percent and your required return on this project is 8 percent, what bid price should you submit on the contract? Note: Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161. Bid price $ 0.52769

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
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Consider a project to supply 102 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle
parcel of land available that cost $1,715,000 five years ago; if the land were sold today, it would net you $1,790,000 aftertax. The land
can be sold for $1,750,000 after taxes in five years. You will need to install $5.45 million in new manufacturing plant and equipment to
actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's five-year life. The
equipment can be sold for $655,000 at the end of the project. You will also need $585,000 in initial net working capital for the project,
and an additional investment of $52,000 in every year thereafter. Your production costs are .50 cents per stamp, and you have fixed
costs of $1,070,000 per year. If your tax rate is 23 percent and your required return on this project is 8 percent, what bid price should
you submit on the contract?
Note: Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.
Bid price
$
0.52769
Transcribed Image Text:Consider a project to supply 102 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,715,000 five years ago; if the land were sold today, it would net you $1,790,000 aftertax. The land can be sold for $1,750,000 after taxes in five years. You will need to install $5.45 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's five-year life. The equipment can be sold for $655,000 at the end of the project. You will also need $585,000 in initial net working capital for the project, and an additional investment of $52,000 in every year thereafter. Your production costs are .50 cents per stamp, and you have fixed costs of $1,070,000 per year. If your tax rate is 23 percent and your required return on this project is 8 percent, what bid price should you submit on the contract? Note: Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161. Bid price $ 0.52769
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