To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems. Martin Enterprises needs someone to supply it with 128,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost you $925,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that, in five years, this equipment can be salvaged for $94,000. Your fixed production costs will be $500,000 per year, and your variable production costs should be $17.65 per carton. You also need an initial investment in net working capital of $96,000. Assume your tax rate is 23 percent and you require a return of 12 percent on your investment a. Assuming that the price per carton is $26.60, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. 32.16.) b. Assuming that the price per carton is $26.60, find the quantity of cartons per year you can supply and still break even. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g.. 32.) c. Assuming that the price per carton is $26.60, find the highest level of fixed costs you could afford each year and still break even. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.161
To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems. Martin Enterprises needs someone to supply it with 128,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost you $925,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that, in five years, this equipment can be salvaged for $94,000. Your fixed production costs will be $500,000 per year, and your variable production costs should be $17.65 per carton. You also need an initial investment in net working capital of $96,000. Assume your tax rate is 23 percent and you require a return of 12 percent on your investment a. Assuming that the price per carton is $26.60, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. 32.16.) b. Assuming that the price per carton is $26.60, find the quantity of cartons per year you can supply and still break even. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g.. 32.) c. Assuming that the price per carton is $26.60, find the highest level of fixed costs you could afford each year and still break even. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.161
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:To solve the bid price problem presented in the text, we set the project NPV equal to
zero and found the required price using the definition of OCF. Thus the bid price
represents a financial break-even level for the project. This type of analysis can be
extended to many other types of problems.
Martin Enterprises needs someone to supply it with 128,000 cartons of machine
screws per year to support its manufacturing needs over the next five years, and you've
decided to bid on the contract. It will cost you $925,000 to install the equipment
necessary to start production; you'll depreciate this cost straight-line to zero over the
project's life. You estimate that, in five years, this equipment can be salvaged for
$94,000. Your fixed production costs will be $500,000 per year, and your variable
production costs should be $17.65 per carton. You also need an initial investment in net
working capital of $96,000. Assume your tax rate is 23 percent and you require a return
of 12 percent on your investment.
a. Assuming that the price per carton is $26.60, what is the NPV of this project? (Do not
round intermediate calculations and round your answer to 2 decimal places, e.g..
32.16.)
b. Assuming that the price per carton is $26.60, find the quantity of cartons per year you
can supply and still break even. (Do not round intermediate calculations and round
your answer to the nearest whole number, e.g.. 32.)
c. Assuming that the price per carton is $26.60, find the highest level of fixed costs you
could afford each year and still break even. (Do not round intermediate calculations
and round your answer to 2 decimal places, e.g., 32.16.)
Transcribed Image Text:a. Assuming that the price per carton is $26.60, what is the NPV of this project? (Do not
round intermediate calculations and round your answer to 2 decimal places, e.g.,
32.16.)
b. Assuming that the price per carton is $26.60, find the quantity of cartons per year you
can supply and still break even. (Do not round intermediate calculations and round
your answer to the nearest whole number, e.g., 32.)
c. Assuming that the price per carton is $26.60, find the highest level of fixed costs you
could afford each year and still break even. (Do not round intermediate calculations
and round your answer to 2 decimal places, e.g., 32.16.)
a. NPV
b. Break-even number of cartons
C.
Break-even fixed costs
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