Guthrie Enterprises needs someone to supply it with 155,000 cartons of machine screws per year to...

4.4 Ratings (908 Votes)

Formula	Year (n)	0	1	2	3	4	5
	Initial investment (I)	-19,50,000
	Units of cartons (U)		1,55,000	1,55,000	1,55,000	1,55,000	1,55,000
	Price/carton (p)		16.29	16.29	16.29	16.29	16.29
	Variable cost/carton (vc)		10.00	10.00	10.00	10.00	10.00
(U*p)	Revenue ('R)		25,25,543	25,25,543	25,25,543	25,25,543	25,25,543
(U*vc)	Total Variable Cost (VC)		15,50,000	15,50,000	15,50,000	15,50,000	15,50,000
	Fixed Cost (FC)		2,80,000	2,80,000	2,80,000	2,80,000	2,80,000
(I/5)	Depreciation (D)		3,90,000	3,90,000	3,90,000	3,90,000	3,90,000
(R-VC-FC-D)	EBIT		3,05,543	3,05,543	3,05,543	3,05,543	3,05,543
40%*EBIT	Tax @ 40%		1,22,217	1,22,217	1,22,217	1,22,217	1,22,217
(EBIT-Tax)	Net income (NI)		1,83,326	1,83,326	1,83,326	1,83,326	1,83,326
	Add: Depreciation (D)		3,90,000	3,90,000	3,90,000	3,90,000	3,90,000
(NI+D)	OCF		5,73,326	5,73,326	5,73,326	5,73,326	5,73,326
(WC is returned at the end of the project)	WC investment (WC)	-1,45,000					1,45,000
salvage*(1-tax)	After-tax salvage (S)						99,000
(I+OCF+WC+S)	Total cash flows (CF)	-20,95,000	5,73,326	5,73,326	5,73,326	5,73,326	8,17,326
1/(1+d)^n	Discount factor @14%	1.000	0.877	0.769	0.675	0.592	0.519
CF*Discount factor	PV of CF	-20,95,000	5,02,917	4,41,156	3,86,979	3,39,455	4,24,493
	NPV	-0.00

Solved using excel Solver. The break even price per carton is $16.29. So, this bid price should do. Ideally it should be slightly higher than this.

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