Chapter 6, Problem 36QAP

Summary Introduction

Adequate information:

Number of units sold for Year 1 = 4,000

Number of units sold for Year 2 = 12,000

Number of units sold for Year 3 = 14,000

Number of units sold for Year 4 = 7,000

Price per unit = $135

Variable costs per unit (V) = $43

Fixed cost (FC) = $775,000

Pre-tax salvage value = $250,000

Cost of equipment = $3,600,000

Useful life of the equipment = 4 years

Net working capital (NWC) = $125,000

Quantity (Q) = 18,000 units

Tax rate (T) = 24% or 0.24

Required return (r) = 13% or 0.13

To compute: Bid price of the contract.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

Bid price refers to the price which the investors are willing to pay for the purchase of security, commodity, or contract.