Raph 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%. Calculate the bid price. (Round to 3 decimals)

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
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Raph 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%. Calculate the bid price. (Round to 3 decimals)
Transcribed Image Text:Raph 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%. Calculate the bid price. (Round to 3 decimals)
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