Your company has been approached to bid on a contract to sell 5,150 voice recognition (VR)...

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Your company has been approached to bid on a contract to sell5,150 voice recognition (VR) computer keyboards a year for fouryears. Due to technological improvements, beyond that time theywill be outdated and no sales will be possible. The equipmentnecessary for the production will cost $3.8 million and will bedepreciated on a straight-line basis to a zero salvage value.Production will require an investment in net working capital of$430,000 to be returned at the end of the project, and theequipment can be sold for $375,000 at the end of production. Fixedcosts are $605,000 per year, and variable costs are $82 per unit.In addition to the contract, you feel your company can sell 12,800,14,900, 18,600, and 11,100 additional units to companies in othercountries over the next four years, respectively, at a price of$184. This price is fixed. The tax rate is 22 percent, and therequired return is 11 percent. Additionally, the president of thecompany will undertake the project only if it has an NPV of$100,000. What bid price should you set for the contract?

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4.0 Ratings (610 Votes)

The first step is to find the PV of the known cash flows 0 1 2 3 4 1 Additional sales in units 12800 14900 18600 11100 Contribution margin after tax at 7956 102122Unit See Answer

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Your company has been approached to bid on a contract to sell5,150 voice recognition (VR) computer keyboards a year for fouryears. Due to technological improvements, beyond that time theywill be outdated and no sales will be possible. The equipmentnecessary for the production will cost $3.8 million and will bedepreciated on a straight-line basis to a zero salvage value.Production will require an investment in net working capital of$430,000 to be returned at the end of the project, and theequipment can be sold for $375,000 at the end of production. Fixedcosts are $605,000 per year, and variable costs are $82 per unit.In addition to the contract, you feel your company can sell 12,800,14,900, 18,600, and 11,100 additional units to companies in othercountries over the next four years, respectively, at a price of$184. This price is fixed. The tax rate is 22 percent, and therequired return is 11 percent. Additionally, the president of thecompany will undertake the project only if it has an NPV of$100,000. What bid price should you set for the contract?