Computation of investment bid price at given cost of capital

Reference no: EM1313858

Your firm is thinking about making a bid to sell 185,000 cartons of machine screws per year over the next five years to a manufacturer that uses the screws in its production process. It will cost your firm $940,000 to install the equipment necessary to start production of the screws, and the cost of that equipment will be depreciated (to zero) on a straight-line basis over the life of the project. It is estimated that the equipment can be salvaged at the end of Year 5 for $70,000. Your fixed production costs will be $305,000 per year, and your variable production costs should be $9.25 per carton. You will also need an initial investment in net working capital of $75,000 (to be returned at the end of the project). If your tax rate is 35 percent and you require a 12 percent return on your investment, what bid price should you submit?

Reference no: EM1313858

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