your company has been approached to bid on a contract to sell 5,050 voice recognition (VR)...

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your company has been approached to bid on a contract to sell5,050 voice recognition (VR) computer keyboards a year for fouryears. Due to thehnical improvements, beyond that time they will beoutdated and no sales will be possible. The equipment necessary forthe production will cost $3.6 million and will be depreciated on astraight line basis to a zero salvage value. Production willrequire an investment in the working capital of $355,000 at the endof production. Fixed costs are $595,000 per year, and variablecosts are $80 per unit. In addition to the contract, you feel yourfeel your company can sell 12,400, 14500, 18.400 and 10,900additional units to companied in other contries over the next fouryears, respectively, at a price of $180. This price is fixed, thetax rate is 25 percent and the required return is 9 percent.Additionally the president of the company will undertake theproject only if it has an NPV of $125,000. What bid price shouldyou set for the contract?

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4.1 Ratings (559 Votes)

Step 1 Calculating Free cash flows Year 1 2 3 4 Additional sales units 12400 14500 18400 10900 Sales price puin 18000 18000 18000 18000 Variable cost puin 8000 8000 8000 8000 aSales value 2232000 2610000 3312000 1962000 bVariable cost See Answer

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your company has been approached to bid on a contract to sell5,050 voice recognition (VR) computer keyboards a year for fouryears. Due to thehnical improvements, beyond that time they will beoutdated and no sales will be possible. The equipment necessary forthe production will cost $3.6 million and will be depreciated on astraight line basis to a zero salvage value. Production willrequire an investment in the working capital of $355,000 at the endof production. Fixed costs are $595,000 per year, and variablecosts are $80 per unit. In addition to the contract, you feel yourfeel your company can sell 12,400, 14500, 18.400 and 10,900additional units to companied in other contries over the next fouryears, respectively, at a price of $180. This price is fixed, thetax rate is 25 percent and the required return is 9 percent.Additionally the president of the company will undertake theproject only if it has an NPV of $125,000. What bid price shouldyou set for the contract?