MGM CO. has been approached to bid on a contract to sell 500 voice recognition(VR) computer...

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MGM CO. has been approached to bid on a contract to sell 500voice 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 necessaryfor the production will cost $3 million and will be depreciated ona straight-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 atthe end of the production. Fixed costs are 570,000 per year, andvariable cost are $75 per unit. In addition to the contract, youfeel your company can sell 11,400, 13500, 17900, and 10400additional units to companies in other countries over the next fouryears, respectively, at the price of $180. This price is fixed. Thetax rate is 21 percent, and the required return is 12 percent.Additionally, the president of the company will undertake theproject only
if it has an NPV of $ 120,000. What bid price should you set forthe contract?
Solve with Pro Forma Income Statement

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Input area Contract quantity 500 Equipment 3000000 Net working capital 395000 Salvage value 305000 Fixed costs 570000 Variable costsunit 75 Mkt sales in Year 1 11400 Mkt sales in Year 2 13500 Mkt sales in Year 3 17900 Mkt sales in Year 4 10400 Market price 180 Tax rate 21 Required return 12 See Answer

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