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Your company has been approached to bid on a contract to sell 21,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4,200,000 and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $150,000 to be returned at the end of the project, and the equipment can be sold for $270,000 at the end of production. Fixed costs are $805,000 per year and variable costs are $45 per unit. In addition to the contract, you feel your company can sell 4,800, 12,400, 14,400, and 7,700 additional units to companies in other countries over the next four years, respectively, at a price of $130. This price is fixed. The tax rate is 25 percent, and the required return is 11 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract? I used a solution as a template that was in this database and came up $111.27 as the bid price and that came back incorrect.  Please help. Thanks

Question

Your company has been approached to bid on a contract to sell 21,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4,200,000 and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $150,000 to be returned at the end of the project, and the equipment can be sold for $270,000 at the end of production. Fixed costs are $805,000 per year and variable costs are $45 per unit. In addition to the contract, you feel your company can sell 4,800, 12,400, 14,400, and 7,700 additional units to companies in other countries over the next four years, respectively, at a price of $130. This price is fixed. The tax rate is 25 percent, and the required return is 11 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000.

 

What bid price should you set for the contract?

 

I used a solution as a template that was in this database and came up $111.27 as the bid price and that came back incorrect.  Please help. Thanks

check_circleAnswer
Step 1

As per the details provided in the question, following are the required calculation where selling price of voice recognition computer keyboard be $ x and additional units are sold at respective selling price.

 

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Step 2

Above table is prepared by using MS Excel formulas.

Hence, the bid price is $26.04

 

 

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Step 3

Working note:

Depreciation tax shield = [($4,200,000 - $270,000)/4]*25% = $245,625

After tax salvage value = $270,000*(1 – 25%) = $202,500

As the company requires a minimum NPV of $100,000, it should set a bid price such ...

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