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

3.7 Ratings (567 Votes)

NPV analysis--- to find the bid price
Initial Investment	-3000000
NWC reqd.	-395000
PV of other addl.revenues/EATs
Yr. 1 after-tax EAT((11400(180-75))-570000)(1-21%)/1.12^1	442258.93
Yr. 2 after-tax EAT((13500(180-75))-570000)(1-21%)/1.12^2	533741.23
Yr. 3 after-tax EAT((17900(180-75))-570000)(1-21%)/1.12^3	736340.23
Yr. 4 after-tax EAT((10400(180-75))-570000)(1-21%)/1.12^4	262074.95
PV of depn. Tax-shields
(3000000/421%3.03735)	478382.63
P/A,i=12%;n=4
PV of after-tax salvage
305000*(1-21%)/1.12^4	153128.08
PV of NWC recovered
395000/1.12^4	251029.64
NPV	-538044.32

After the above NPV calculations,
we can calculate the bid price as follows:
If x is the bid-price/unit, such that ,it must satisfy the foll. Equation,
5000(x-75)(1-21%)*3.03735=538044+120000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â (P/A,i=12%; n=4)
Solving the above, we get the minimum bid-price /unit as
$ 129.85 o r $ 130 /unit

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