Dunder-Mifflin, Inc., is analyzing the potential profitability of three printing jobs put up for bid by the State Department of Revenue: Job A Job B Job C Projected winning bid(per unit) 5.00 $ 8.00 $ 7.50 $ Direct cost per unit 2.00 $ 4.30$ 3.00 $ Annual unit sales volume 800,000 650,000 450,000 Annual distribution costs 90,000 $ 75,000 $ 55,000$ Investment required to produce annual volume 5,000,000 $ 5,200,000$ 4,000,000$ Assume that: (1) the company’s marginal city-plus-state-plus-federal tax rate is 50%; (2) each job is expected to have a six-year life; (3) the firm uses straight-line depreciation; (4) the average cost of capital is 14%; (5) the jobs have the same risk as the firm’s other business; and (6) the company has already spent $60,000 on developing the precedingdata.This $60,000 has been capitalized and will be amortized over the life of the project. A. What is the expected net cash flow each year? B. What is the net present value of each project? On which project, if any, should the company bid? C. Suppose that Dunder-Mifflin’s primary business is quite cyclical, improving and decliningwith the economy, butthat jobAis expected to be countercyclical.Might this have any bearing on your decision?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Dunder-Mifflin, Inc., is analyzing the potential profitability of three printing jobs put up for bid by the State Department of Revenue:

	Job A	Job B	Job C
Projected winning bid(per unit)	5.00 $	8.00 $	7.50 $
Direct cost per unit	2.00 $	4.30$	3.00 $
Annual unit sales volume	800,000	650,000	450,000
Annual distribution costs	90,000 $	75,000 $	55,000$
Investment required to produce annual volume	5,000,000 $	5,200,000$	4,000,000$

Assume that:

(1) the company’s marginal city-plus-state-plus-federal tax rate is 50%;

(2) each job is expected to have a six-year life;

(3) the firm uses straight-line depreciation;

(4) the average cost of capital is 14%;

(5) the jobs have the same risk as the firm’s other business;

and (6) the company has already spent $60,000 on developing the precedingdata.This $60,000 has been capitalized and will be amortized over the life of the project.

A. What is the expected net cash flow each year?

B. What is the net present value of each project? On which project, if any, should the company bid?

C. Suppose that Dunder-Mifflin’s primary business is quite cyclical, improving and decliningwith the economy, butthat jobAis expected to be countercyclical.Might this have any bearing on your decision?

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