V The technique for calculating a bid price can be extended to many other types of problems....

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Finance

V
The technique for calculating a bid price can be extended tomany other types of problems. Answer the following questions usingthe same technique as setting a bid price; that is, set the projectNPV to zero and solve for the variable in question. GuthrieEnterprises needs someone to supply it with 159,000 cartons ofmachine screws per year to support its manufacturing needs over thenext five years, and you’ve decided to bid on the contract. It willcost $1,990,000 to install the equipment necessary to startproduction; you’ll depreciate this cost straight-line to zero overthe project’s life. You estimate that in five years this equipmentcan be salvaged for $169,000. Your fixed production costs will be$284,000 per year, and your variable production costs should be$11.30 per carton. You also need an initial investment in networking capital of $149,000. The tax rate is 24 percent and yourequire a return of 13 percent on your investment. Assume that theprice per carton is $17.90.

a.
Calculate the project NPV. (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)
b.
What is the minimum number of cartons per year that can besupplied and still break even? (Do not round intermediatecalculations and round your answer to the nearest whole number,e.g., 32.)
c.
What is the highest fixed costs that could be incurred and stillbreak even? (Do not round intermediate calculations andround your answer to 2 decimal places, e.g., 32.16.

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4.1 Ratings (626 Votes)

aOperating cash flow OCF each year income after tax depreciationNPV is calculated using NPV function See Answer

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VThe technique for calculating a bid price can be extended tomany other types of problems. Answer the following questions usingthe same technique as setting a bid price; that is, set the projectNPV to zero and solve for the variable in question. GuthrieEnterprises needs someone to supply it with 159,000 cartons ofmachine screws per year to support its manufacturing needs over thenext five years, and you’ve decided to bid on the contract. It willcost $1,990,000 to install the equipment necessary to startproduction; you’ll depreciate this cost straight-line to zero overthe project’s life. You estimate that in five years this equipmentcan be salvaged for $169,000. Your fixed production costs will be$284,000 per year, and your variable production costs should be$11.30 per carton. You also need an initial investment in networking capital of $149,000. The tax rate is 24 percent and yourequire a return of 13 percent on your investment. Assume that theprice per carton is $17.90. a.Calculate the project NPV. (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)b.What is the minimum number of cartons per year that can besupplied and still break even? (Do not round intermediatecalculations and round your answer to the nearest whole number,e.g., 32.)c.What is the highest fixed costs that could be incurred and stillbreak even? (Do not round intermediate calculations andround your answer to 2 decimal places, e.g., 32.16.