Chapter 6, Problem 30QP

Calculating a Bid Price Another utilization of cash flow analysis is selling the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price represents a financial breakeven level for the project. Guthrie Enterprises needs someone to supply it with 165,000 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 $2,300,000 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 $150,000. Your fixed production costs will be $450,000 per year, and your variable production costs should be $9.25 per carton. You also need an initial investment in net working capital of $130,000. If your tax rate is 35 percent and you require a 14 percent return on your investment, what bid price should you submit?