Reference no: EM132910346
Question - ABC Corp. has decided to ask suppliers to bid on the 150,000 cartons of precision machine screws that ABC Corp. needs to purchase per year to support its manufacturing needs over the next five years. You have decided to submit a bid to supply the machine screws.
-It will cost you $780,000 to install the necessary equipment which will be fully depreciated over a straight line basis over five years (means salvage value will be zero at the end of the fifth year).
-You decide to place the equipment in an idle warehouse that you could have otherwise rented out for $80,000 per year.
-Incremental Selling, General & Administrative expense will be $160,000 a year and variable costs will be $8.50 per carton.
-For simplicity, assume the level of net working capital equals zero from Year 0 to Year 5.
-To finance the project, Bank of America has agreed to lend to you a loan with an amount of $780,000. The interest rate is 5% per year.
-The project has a 16% cost of capital and a 35% tax rate.
Required - What is the minimum price per carton that you should bid?