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Calculate the minimum bid value in the given case.

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A company has posted a request for bid on 230k cases of widgets per year over the next 5 years. Determine what bid price makes the most sense as a potential supplier.

An Initial investment of 1 million is required to begin production. This investment will be depreciated using the straight line to zero method throughout the course of the project.

Fixed costs are 410k /yr and variable cost is 8.50 per case.

A Net working capital investment of 60k will also be required, none of which shall be returned at the end of the project. Assuming a 35% tax rate and a 14% return, what should the bid price be?

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Solution Summary

Solution provides methodology and calculations to determine the minimum bid offer from the supplier's point of view.

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Initial Investment=1 million=1000 k
Net working capital required=60k
Total initial cash outflow=(1000+60)=1060 k

Depreciation per year=(Initial investment-Salvage)/Useful life=(1000-0)/5 = 200k

Fixed Cost per year=410 k
Variable cost per year=230*8.5=1955 k
Total Cost per ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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