Inc. needs someone to supply it with 1,000,000 planks of wood per year to support its manufacturing needs over the next six years, and your company has decided to bid on the contract. It will cost your firm $5,000,000 to install the equipment necessary to start production. The equipment will be depreciated using the straight-line method to 0 over the project's life. The salvage value of the equipment is expected to be 0. Your fixed costs will be $2,000,000 annually, and your variable production costs are $14 per plank. You also need an initial investment in net working capital of $2,000,000, which will be recovered at the end of the project. The firm has a tax rate of 21%, and the required rate of return is 10%. A) Calculate the initial cash outflow (enter a negative value and round to 2 decimals) B) Calculate the bid price. (Round to 3 decimals) C) Based on the bid price, calculate the OCF for year 1. (Round to 2 decimals)
James
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Inc. needs someone to supply it with 1,000,000 planks of wood per year to support its manufacturing needs over the next six years, and your company has decided to bid on the contract. It will cost your firm $5,000,000 to install the equipment necessary to start production. The equipment will be A) Calculate the initial B) Calculate the bid price. (Round to 3 decimals) C) Based on the bid price, calculate the OCF for year 1. (Round to 2 decimals) |
The initial cost of the investment proposal can be referred to as the cost that will be incurred before commencing the project. It includes the cost of the machine along with the net working capital used before commencing the project.
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