Last month your company posted $100,000 with Contracts-R-Us to get approved to bid on contracts via their website. Trump Enterprises is looking for a supplier of red baseball caps, and your boss wants you to bid on the contract. The company requires 112,000 baseball caps per year over the next five years. You estimate that the necessary equipment will cost $790,000, and the equipment will be depreciated straight-line to zero over the project's life. You believe this equipment can be sold for $62,000 at the end of the project. You further estimate the fixed costs to be $317,000 per year, and the variable production costs to be $9.50 per hat. You'll need an initial investment in net working capital of $67,000, but this will be recovered at the end of the project. Your tax rate is 35 percent and you require a return of 12 percent on your investment.
Last month your company posted $100,000 with Contracts-R-Us to get approved to bid on contracts via their website. Trump Enterprises is looking for a supplier of red baseball caps, and your boss wants you to bid on the contract. The company requires 112,000 baseball caps per year over the next five years. You estimate that the necessary equipment will cost $790,000, and the equipment will be depreciated straight-line to zero over the project's life. You believe this equipment can be sold for $62,000 at the end of the project. You further estimate the fixed costs to be $317,000 per year, and the variable production costs to be $9.50 per hat. You'll need an initial investment in net working capital of $67,000, but this will be recovered at the end of the project. Your tax rate is 35 percent and you require a return of 12 percent on your investment.
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Last month your company posted $100,000 with Contracts-R-Us to get approved to bid
on contracts via their website. Trump Enterprises is looking for a supplier of red baseball
caps, and your boss wants you to bid on the contract. The company requires 112,000
baseball caps per year over the next five years. You estimate that the necessary
equipment will cost $790,000, and the equipment will be depreciated straight-line to
zero over the project's life. You believe this equipment can be sold for $62,000 at the
end of the project.
You further estimate the fixed costs to be $317,000 per year, and the variable production
costs to be $9.50 per hat. You'll need an initial investment in net working capital of
$67,000, but this will be recovered at the end of the project. Your tax rate is 35 percent
and you require a return of 12 percent on your investment.
What is the lowest bid price (per unit) you should submit (i.e. price where NPV=O)?
Part A: Start by calculating the operating cash flow that, when received as an annuity for
5 years, would set the NPV = 0. (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.)
OCF*
Part B: Now calculate the bid price. (Do not round intermediate calculations and
round your answer to 2 decimal places, e.g., 32.16.)
Bid price
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