Question

Guthrie Enterprises needs someone to supply it with 210,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost $2,650,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that in five years this equipment can be salvaged for $220,000. Your fixed production costs will be $705,000 per year, and your variable production costs should be $9.51 per carton. You also need an initial investment in net working capital of $375,000. If your tax rate is 22 percent and you require a 10 percent return on your investment, what bid price per carton should you submit?

Answer 1

Answer:

$6.9807 per carton

Explanation:

210,000 cartons of machine screws

equipment cost $2,650,000

depreciation per year = ($2,650,000 - $220,000) / 5 = $486,000

fixed manufacturing costs $705,000 per year

variable costs per carton = $9.51 x 210,000 = $1,997,100

initial investment in net working capital $375,000

tax rate 22%

discount rate 10%

price per carton?

initial investment = -$3,025,000

CF₁ = [(R - $705,000 - $486,000) x 0.78] + $486,000 = 0.78R - $442,980

CF₂ = [(R - $705,000 - $486,000) x 0.78] + $486,000 = 0.78R - $442,980

CF₃ = [(R - $705,000 - $486,000) x 0.78] + $486,000 = 0.78R - $442,980

CF₄ = [(R - $705,000 - $486,000) x 0.78] + $486,000 = 0.78R - $442,980

CF₅ = [(R - $705,000 - $486,000) x 0.78] + $486,000 + $220,000 + $375,000 = 0.78R + $152,020

$3,025,000 = (0.78R - $442,980) / 1.1 + (0.78R - $442,980) / 1.1² + (0.78R - $442,980) / 1.1³ + (0.78R - $442,980) / 1.1⁴ + (0.78R + $152,020) / 1.1⁵ = 0.709R - $402,709 + 0.645R - $366,099 + 0.586R - $332,817 + 0.533R - $302,561 + 0.484R + $94,392

$3,025,000 = 2.957R - $1,309,794

$4,334,794 = 2.957R

R = $4,334,794 / 2.957 = $1,465,943.19

total revenue = $1,465,943.19

revenue per carton = $1,465,943.19 / 210,000 = $6.98