Bid price represents financial break-even level

Assignment Help Financial Management

Reference no: EM131309673

Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price represents a financial break-even level for the project. Guthrie Enterprises needs someone to supply it with 150,000 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 you $1,900,000 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 $160,000. Your fixed production costs will be $275,000 per year, and your variable production costs should be $9.50 per carton. You also need an initial investment in net working capital of $140,000. If your tax rate is 40 percent and you require a return of 12 percent on your investment, what bid price per carton should you submit? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Reference no: EM131309673

Questions Cloud

The price of gold for the remaining life of the mine : Hickock Mining is evaluating when to open a gold mine. The mine has 46,400 ounces of gold left that can be mined, and mining operations will produce 5,800 ounces per year. The required return on the gold mine is 12 percent, and it will cost $33.8 mil..

What is the firms effective cost of borrowing : ABC Company has an average collection period of 36 days and factors all of its receivables immediately at a 1.2 percent discount. Assume all accounts are collected in full. What is the firm's effective cost of borrowing?

Expansion project that initial fixed asset investment : Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.73 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,090,000 in ..

Initial investment in spare parts inventory : Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $550,000 is estimated to result in $230,000 in annual pretax cost savings. The press also requires an initial investment in sp..

Bid price represents financial break-even level : Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price represents a financial break-even level for the project...

The level of risk is same for the two alternatives : Suppose you have $10,000 you wish to invest. explain whether you would be better off putting your money in the foreign or domestic alternative presented.

Firm is considering investment in new machine with price : A firm is considering an investment in a new machine with a price of $18.07 million to replace its existing machine. The current machine has a book value of $6.07 million and a market value of $4.57 million. The new machine is expected to have a four..

Expected stock price : ABC’s last dividend paid was $0.44, its required return is 14%, its growth rate is 4%. What is ABC's expected stock price in 11 years?

What is the firm cost of equity if the current stock price : ABC Inc. just paid its first annual dividend of $1.9 a share. The firm plans to increase the dividend by 4 percent per year indefinitely. What is the firm’s cost of equity if the current stock price is $66.62 a share?

User Account

All Pages