Explanation Given information: A project is considered to supply hundred million postal stamps to the postal service of Country U for the next 5 years. Person X has an idle parcel of land with a cost of $850,000 five years ago, if the sale of the land takes place today then, it would worth $1,080,000 after the tax. The sale of land can be made after 5 years for $1,150,000 after the taxes. Person X needs $4.6 million for installing the new plants and the machines for manufacturing the stamps. The plant and the machinery will be depreciated in a straight line to zero over the project’s life for 5 years. The sale of the equipment can be made for $400,000 at the project’s end. The initial net working capital that is essential for the project is $600,000 and the additional investment for every year is $50,000. The production cost for a stamp is 0.45 cents, the fixed cost is $1,200,000 per year. The tax rate is 34% and the rate of return is $12%. Note: To calculate the bid price, it is essential to compute the project’s other cash flows. Formulae to compute the after-tax salvage value: After-tax salvage value = Market value + ( Book value − Market value ) T C Compute the after-tax salvage value: After tax salvage value = Market value + ( 0 − Market value ) T C After tax salvage value = Market value + ( 1 − T C ) = $ 400 , 000 ( 1 − 0.34 ) = $ 400 , 000 ( 0.66 ) = $ 264 , 000 Hence, the after-tax salvage value $264,000. Note: The operating cash flow can be solved, that gives the net present value of the project as zero. The present after-tax cost of the land is the opportunity cost , but it is essential to include the land’s after-tax value for 5 years as the land can be sold at that time. Formulae to calculate the net present value: Net present value = ( Present value of cash inflows − Present value of cash outflows ) Note: With the help of the operating cash flow, the net present value is computed by using the above formulae. PVIFA is the present value interest factor of an annuity. Computation of the net present value: Net present value = ( − Present value of cash outflows + Present value of cash inflows ) 0 = ( − $ 4 , 600 , 000 − $ 1 , 080 , 000 − $ 600 , 000 + OCF ( PVIFA 12 % 5 ) − $ 50 , 000 ( PVIFA 12 % 4 ) [ ( $ 264 , 000 + $ 600 , 000 + 4 ( $ 50 , 0000 ) + $ 1 , 150 , 000 ) ( 10125 ) ] ) 0 = ( − $ 4 , 600 , 000 − $ 1 , 080 , 000 − $ 600 , 000 + OCF ( 3

11th Edition

ISBN: 9780077861704

Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor

Publisher: McGraw-Hill Education

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Chapter 10, Problem 22QP

Summary Introduction

To find: The bid price.

Introduction:

The price that a buyer is ready to make payment for a security is the bid price.

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Chapter 10, Problem 21QP

Chapter 10, Problem 23QP

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Consider a project to supply 102 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,715,000 five years ago; if the land were sold today, it would net you $1,790,000 aftertax. The land can be sold for $1,750,000 after taxes in five years. You will need to install $5.45 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's five-year life. The equipment can be sold for $655,000 at the end of the project. You will also need $585,000 in initial net working capital for the project, and an additional investment of $52,000 in every year thereafter. Your production costs are .50 cents per stamp, and you have fixed costs of $1,070,000 per year. If your tax rate is 23 percent and your required return on this project is 8 percent, what bid price should you submit on the contract? Note: Do not round…

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Chapter 10 Solutions

Fundamentals of Corporate Finance

Ch. 10.1 - What are the relevant incremental cash flows for...Ch. 10.1 - What is the stand-alone principle?Ch. 10.2 - Prob. 10.2ACQ Ch. 10.2 - Prob. 10.2BCQ Ch. 10.2 - Explain why interest paid is not a relevant cash...Ch. 10.3 - What is the definition of project operating cash...Ch. 10.3 - For the shark attractant project, why did we add...Ch. 10.4 - Prob. 10.4ACQ Ch. 10.4 - How is depreciation calculated for fixed assets...Ch. 10.5 - Prob. 10.5ACQ

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The bid price. Introduction: The price that a buyer is ready to make payment for a security is the bid price.

Solution Summary: The author explains that a buyer's bid price is 0.03351. The project supplies 100 million postal stamps to the postal service of Country U.

To find: The bid price. Introduction: The price that a buyer is ready to make payment for a security is the bid price.

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Chapter 10 Solutions

To find: The bid price.

Introduction:

The price that a buyer is ready to make payment for a security is the bid price.