Straight-line to zero over the projects five-year life

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Reference no: EM131047529

Consider a project to supply 100 million postage stamps per year to the USPS for the next five years. You have an idle parcel of land available that cost $850,000 five years ago; if the land were sold today it would net you $1,080,000 after-tax. The land can be sold for $1,150,000 after taxes in five years. You will need to install $4.6 million in new manufacturing plant and equipment to produce the stamps; the plant and equipment will be depreciated straight-line to zero over the projects five-year life. The equipment can be sold for $400,000 at the end of the project. You will also need $600,000 in initial net working capital for the project and an additional investment of $50,000 in every year thereafter. Your production costs are 0.45 dollars per stamp, and you have fixed costs of $1,200,000 per year. If your tax rate is 34% and your required return on this project is 12%, what bid should you submit on the contract?

Reference no: EM131047529

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