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

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Finance

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

Answer & Explanation Solved by verified expert
3.9 Ratings (577 Votes)
Depreciation each year cost of equipment depreciable life 3000000 4 750000operating cash    See Answer
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