Consider a project to supply 102 million postage stamps per year to the U.S. Postal Service...

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Consider a project to supply 102 million postage stamps per yearto the U.S. Postal Service for the next five years. You have anidle 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. Youwill need to install $5.45 million in new manufacturing plant andequipment to actually produce the stamps; this plant and equipmentwill be depreciated straight-line to zero over the project’sfive-year life. The equipment can be sold for $655,000 at the endof the project. You will also need $585,000 in initial net workingcapital for the project, and an additional investment of $52,000 inevery year thereafter. Your production costs are .50 cents perstamp, and you have fixed costs of $1,070,000 per year. If your taxrate is 23 percent and your required return on this project is 8percent, what bid price should you submit on the contract? (Do notround intermediate calculations and round your answer to 5 decimalplaces, e.g., 32.16161.)
What is the bid price?

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3.9 Ratings (557 Votes)

Depreciation 5450000 5 1090000salvage value after tax 6550001 023 504350let the bid price xGiven discount rate is 8NPV initial cash outflow present value of future See Answer

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Consider a project to supply 102 million postage stamps per yearto the U.S. Postal Service for the next five years. You have anidle 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. Youwill need to install $5.45 million in new manufacturing plant andequipment to actually produce the stamps; this plant and equipmentwill be depreciated straight-line to zero over the project’sfive-year life. The equipment can be sold for $655,000 at the endof the project. You will also need $585,000 in initial net workingcapital for the project, and an additional investment of $52,000 inevery year thereafter. Your production costs are .50 cents perstamp, and you have fixed costs of $1,070,000 per year. If your taxrate is 23 percent and your required return on this project is 8percent, what bid price should you submit on the contract? (Do notround intermediate calculations and round your answer to 5 decimalplaces, e.g., 32.16161.)What is the bid price?