Reference no: EM131917132

You have been assigned to respond to an RFP on a contract to supply 17,500 units of a product per year to a U.S company for a period of four (4) years. The necessary capital investment is $3.4 million, which will be depreciated for tax purposes to zero over the four year life of the project. The equipment is expected to have a $275,000 residual value at the completion of the contract. The added production and sales are estimated to require an additional $90,000 of inventory, $75,000 of accounts receivable and $70,000 of accounts payable for the duration of the contract. The costs associated with the production are as follows: Direct labor: $1.0 million Materials: $2.0 million Direct power and light: $62,500 Occupancy, insurance and other overheads: $600,000 If your firm takes on this contract, it can use the same resources to make and sell additional units of the product for export to European clients, at a price of $285 each, over the four years of the project, as follows: Year 1 3,000 units; Year 2 6,000 units; Year 3 8,000 units; Year 4 5,000 units. These would be in addition to the 17,500 units per year supplied under the contract. The firm's tax rate is 40%. The funding cost for the proposed project is 13%. Finally, the minimum acceptable NPV is a positive $100,000. Required: Come up with price the firm should bid on the contract for 17,500 units per year to the U.S. company.