MGM Co. has been approached to bid on a contract to sell 5,000 voice recognition (VR)...

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MGM Co. has been approached to bid on a contract to sell 5,000voice recognition (VR) computer keyboards per year for four years.Due to technological improvements, beyond that time they will beoutdated and no sales will be possible. The equipment necessary forthe production will cost $3million and will be depreciated on astraight-line basis to a zero-salvage value. Production willrequire an investment in net working capital of $395,000 to bereturned at the end of the project, and the equipment can be soldfor $305,000 at the end of production. Fixed costs are $570,000 peryear, and variable costs are $75 per unit. In addition to thecontract, you feel your company can sell 11,400, 13,500, 17,900,and 10,400 additional units to companies in other countries overthe next four years, respectively, at a price of $180. This priceis fixed. The tax rate is 21 percent, and the required return is 12percent. Additionally, the president of the company will undertakethe project only if it has an NPV of $120,000. What bid priceshould you set for the contract?

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4.2 Ratings (781 Votes)

VR 0 1 2 3 4 Unit Sales 11400 13500 17900 10400 Investment 3000000 NWC 395000 395000 Salvage 305000 Sales 2701250 3079250 3871250 2521250 VC 1230000 1387500 1717500 See Answer

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