Heer Enterprises needs someone to supply it with 130,000 cartons of machine screws per year to support its manufacturing needs over the next four years, and you've decided to bid on the contract. It will cost you $765,000 to install the equipment necessary to start production; this equipment is classified as a five- year MACRS property for tax purposes. You estimate that in four years, this equipment can be salvaged for $100,000 (i.e., you can sell it at the end of Year 4 for $100,000). Your fixed production costs will be $180,000 per year in the first two years and $200,000 per year in the last two years. Your variable production costs should be $8.20 per carton throughout the project. You also need an initial investment in net working capital of $59,500 and an additional investment of $1,500 in every year thereafter. All new working capital will be recovered when the project ends. Your tax rate is 22 percent and you require a return of 14.5 percent. What bid price per carton should you submit? The MACRS depreciation schedules are as follows: Year 1 2 3 4 5 6 7 8 Three-Year 33.33% 44.45 14.81 7.41 Five-Year 20.00% 32.00 19.20 11.52 11.52 5.76 Seven-Year 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46
Heer Enterprises needs someone to supply it with 130,000 cartons of machine screws per year to support its manufacturing needs over the next four years, and you've decided to bid on the contract. It will cost you $765,000 to install the equipment necessary to start production; this equipment is classified as a five- year MACRS property for tax purposes. You estimate that in four years, this equipment can be salvaged for $100,000 (i.e., you can sell it at the end of Year 4 for $100,000). Your fixed production costs will be $180,000 per year in the first two years and $200,000 per year in the last two years. Your variable production costs should be $8.20 per carton throughout the project. You also need an initial investment in net working capital of $59,500 and an additional investment of $1,500 in every year thereafter. All new working capital will be recovered when the project ends. Your tax rate is 22 percent and you require a return of 14.5 percent. What bid price per carton should you submit? The MACRS depreciation schedules are as follows: Year 1 2 3 4 5 6 7 8 Three-Year 33.33% 44.45 14.81 7.41 Five-Year 20.00% 32.00 19.20 11.52 11.52 5.76 Seven-Year 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...
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Transcribed Image Text:Heer Enterprises needs someone to supply it with 130,000 cartons of machine screws per year to support
its manufacturing needs over the next four years, and you've decided to bid on the contract. It will cost
you $765,000 to install the equipment necessary to start production; this equipment is classified as a five-
year MACRS property for tax purposes. You estimate that in four years, this equipment can be salvaged
for $100,000 (i.e., you can sell it at the end of Year 4 for $100,000). Your fixed production costs will be
$180,000 per year in the first two years and $200,000 per year in the last two years. Your variable
production costs should be $8.20 per carton throughout the project. You also need an initial investment
in net working capital of $59,500 and an additional investment of $1,500 in every year thereafter. All new
working capital will be recovered when the project ends. Your tax rate is 22 percent and you require a
return of 14.5 percent. What bid price per carton should you submit?
The MACRS depreciation schedules are as follows:
Year
1
2
3
4
5
6
7
8
Three-Year
33.33%
44.45
14.81
7.41
Five-Year
20.00%
32.00
19.20
11.52
11.52
5.76
Seven-Year 14.29% 24.49
17.49
12.49
8.93
8.92
8.93
4.46
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