![Fundamentals of Corporate Finance with Connect Access Card](https://www.bartleby.com/isbn_cover_images/9781259418952/9781259418952_largeCoverImage.gif)
Concept explainers
Calculating a Bid Price [LO3] Your company has been approached to bid on a contract to sell 4,800 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $2.9 million and will be
![Check Mark](/static/check-mark.png)
To find: The bid price that must be set for the contract.
Introduction:
Bid price is the price, at which a market-maker or dealer is prepared to buy securities or shares or other assets.
Answer to Problem 35QP
The bid price is $192.71.
Explanation of Solution
Given information:
The company of Person X is been approached to bid on a contract to sell 4,800 voice recognition computer keyboards for the year for four years. As there prevail technological improvements the equipment will be outdated. The cost of the equipment that is essential for production is $2.9 million and will be depreciated on a straight line to a zero salvage value.
The production needs an investment in the net working capital of $175,000 to be returned at the project’s end and the sales of the equipment can be made for $275,000 at the end of the production. The fixed cost is $570,000 and the variable cost is $115 for a year. Additionally the company can sell 11,400, 13,500, 17,900, and 10,400 extra units to the companies in various countries for the upcoming 4 years at $210 (this is a fixed price).
The rate of tax is 40% and the required rate of return is 10%. In addition the president of the company will take over the project only if it has the net present value of $100,000.
Computation of the cash flows that are generated from the keyboard sales to other countries are as follows:
Particulars | Year 1 | Year 2 | Year 3 | Year 4 |
Sales | $2,394,000 | $2,835,000 | $3,759,000 | $2,184,000 |
Less: Variable costs | $1,311,000 | $1,552,500 | $2,058,500 | $1,196,000 |
EBT | $1,083,000 | $1,282,500 | $1,700,500 | $988,000 |
Less: Tax | $433,200 | $513,000 | $680,200 | $395,200 |
Net income (and OCF) | $649,800 | $769,500 | $1,020,300 | $592,800 |
Calculations for the above cash flows:
Sales:
For Year 1:
For Year 2:
For Year 3:
For Year 4:
Variable cost:
For Year 1:
For Year 2:
For Year 3:
For Year 4:
Tax:
For Year 1:
For Year 2:
For Year 3:
For Year 4:
Formula to calculate the net present value for additional sales:
Note: Calculation of NPV of addition sale did not include the initial cash outflow, depreciation, and fixed assets.
Computation of the net present value for additional sales:
Hence, the net present value is $2,398,134.55.
Formula to calculate the after tax salvage value:
Computation of the after tax salvage value:
Hence, the after tax salvage value is $165,000.
Formula to calculate the operating cash flow of the project with the net present value:
Note:
- NPV for entire project is taken as $100,000.
- PVIFA represents Present Value Interest of Future Annuity.
- NWC represents Net Working Capital.
Computation of the operating cash flow of the project:
Hence, the operating cash flow is $171,818.32.
Formula to calculate the bid price:
Computation of the bid price:
Hence, bid price is $192.71.
Want to see more full solutions like this?
Chapter 10 Solutions
Fundamentals of Corporate Finance with Connect Access Card
- You have an investment worth $61,345 that is expected to make regular monthly payments of $1,590 for 20 months and a special payment of $X in 3 months. The expected return for the investment is 0.92 percent per month and the first regular payment will be made in 1 month. What is X? Note: X is a positive number.arrow_forwardA bond with a par value of $1,000 and a maturity of 8 years is selling for $925. If the annual coupon rate is 7%, what’s the yield on the bond? What would be the yield if the bond had semiannual payments?arrow_forwardYou want to buy equipment that is available from 2 companies. The price of the equipment is the same for both companies. Silver Fashion would let you make quarterly payments of $14,930 for 8 years at an interest rate of 1.88 percent per quarter. Your first payment to Silver Fashion would be today. Valley Fashion would let you make X monthly payments of $73,323 at an interest rate of 0.70 percent per month. Your first payment to Valley Fashion would be in 1 month. What is X?arrow_forward
- You just bought a new car for $X. To pay for it, you took out a loan that requires regular monthly payments of $1,940 for 12 months and a special payment of $25,500 in 4 months. The interest rate on the loan is 1.06 percent per month and the first regular payment will be made in 1 month. What is X?arrow_forwardYou own 2 investments, A and B, which have a combined total value of $38,199. Investment A is expected to pay $85,300 in 6 years and has an expected return of 18.91 percent per year. Investment B is expected to pay $37,200 in X years and has an expected return of 18.10 percent. What is X?arrow_forwardYou own 2 investments, A and B, which have a combined total value of $51,280. Investment A is expected to pay $57,300 in 5 years and has an expected return of 13.13 percent per year. Investment B is expected to pay $X in 11 years and has an expected return of 12.73 percent per year. What is X?arrow_forward
- Equipment is worth $225,243. It is expected to produce regular cash flows of $51,300 per year for 9 years and a special cash flow of $27,200 in 9 years. The cost of capital is X percent per year and the first regular cash flow will be produced in 1 year. What is X?arrow_forward2 years ago, you invested $13,500. In 2 years, you expect to have $20,472. If you expect to earn the same annual return after 2 years from today as the annual return implied from the past and expected values given in the problem, then in how many years from today do you expect to have $55,607?arrow_forwardYou plan to retire in 5 years with $650,489. You plan to withdraw $88,400 per year for 20 years. The expected return is X percent per year and the first regular withdrawal is expected in 6 years. What is X?arrow_forward
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage LearningCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
![Text book image](https://www.bartleby.com/isbn_cover_images/9781305627734/9781305627734_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)