To solve the bid price problem presented in the text, we set the project NPV equal...

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Finance

To solve the bid price problem presented in the text, we set theproject NPV equal to zero and found the required price using thedefinition of OCF. Thus the bid price represents a financialbreak-even level for the project. This type of analysis can beextended to many other types of problems.
Martin Enterprises needssomeone to supply it with 145,000 cartons of machine screws peryear to support its manufacturing needs over the next five years,and you’ve decided to bid on the contract. It will cost you$1,010,000 to install the equipment necessary to start production;you’ll depreciate this cost straight-line to zero over theproject’s life. You estimate that, in five years, this equipmentcan be salvaged for $145,000. Your fixed production costs will be$585,000 per year, and your variable production costs should be$19.35 per carton. You also need an initial investment in networking capital of $130,000. Assume your tax rate is 25 percent andyou require a return of 10 percent on your investment.

a.
Assuming that the price per carton is $30.00, what is the NPV ofthis project? (Do not round intermediate calculations andround your answer to 2 decimal places, e.g., 32.16.)
b. Assuming that the price per carton is $30.00, find the quantityof cartons per year you can supply and still break even.(Do not round intermediate calculations and round youranswer to the nearest whole number, e.g., 32.)
c. Assuming that the price per carton is $30.00, find the highestlevel of fixed costs you could afford each year and still breakeven. (Do not round intermediate calculations and roundyour answer to 2 decimal places, e.g., 32.16.)

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Answer a Year 0 cash flow Year 0 cash flow cost of equipment net working capital 1010000 130000 1140000 Year 1 to 5 Annual depreciation cost of equipment salvage value useful life 1010000 0 5 202000 Annual depreciation tax shied 202000 25 50500 Annual cash flow sale price variable cost units Fixed cost 1 Tax See Answer

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Transcribed Image Text

To solve the bid price problem presented in the text, we set theproject NPV equal to zero and found the required price using thedefinition of OCF. Thus the bid price represents a financialbreak-even level for the project. This type of analysis can beextended to many other types of problems. Martin Enterprises needssomeone to supply it with 145,000 cartons of machine screws peryear to support its manufacturing needs over the next five years,and you’ve decided to bid on the contract. It will cost you$1,010,000 to install the equipment necessary to start production;you’ll depreciate this cost straight-line to zero over theproject’s life. You estimate that, in five years, this equipmentcan be salvaged for $145,000. Your fixed production costs will be$585,000 per year, and your variable production costs should be$19.35 per carton. You also need an initial investment in networking capital of $130,000. Assume your tax rate is 25 percent andyou require a return of 10 percent on your investment. a.Assuming that the price per carton is $30.00, what is the NPV ofthis project? (Do not round intermediate calculations andround your answer to 2 decimal places, e.g., 32.16.)b.Assuming that the price per carton is $30.00, find the quantityof cartons per year you can supply and still break even.(Do not round intermediate calculations and round youranswer to the nearest whole number, e.g., 32.)c.Assuming that the price per carton is $30.00, find the highestlevel of fixed costs you could afford each year and still breakeven. (Do not round intermediate calculations and roundyour answer to 2 decimal places, e.g., 32.16.)

a.	Assuming that the price per carton is $30.00, what is the NPV ofthis project? (Do not round intermediate calculations andround your answer to 2 decimal places, e.g., 32.16.)
b.	Assuming that the price per carton is $30.00, find the quantityof cartons per year you can supply and still break even.(Do not round intermediate calculations and round youranswer to the nearest whole number, e.g., 32.)
c.	Assuming that the price per carton is $30.00, find the highestlevel of fixed costs you could afford each year and still breakeven. (Do not round intermediate calculations and roundyour answer to 2 decimal places, e.g., 32.16.)