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Fundamentals of Corporate Finance

Dahlia Enterprises needs someone to supply it with 114,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost you \$810,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that in five years, this equipment can be salvaged for \$64,000. Your fixed production costs will be \$319,000 per year, and your variable production costs should be \$9.70 per carton. You also need an initial investment in net working capital of \$69,000. If your tax rate is 30 percent and your required return is 11 percent on your investment, what bid price should you submit?

Solution Preview

Initial Investment=810,000
Net working capital required=69000
Total initial cash outflow=(810000+69000)= 8,79,000

Depreciation per year=(Initial investment-Salvage)/Useful life=(810000-0)/5 = 162000

Fixed Cost per year=319,000
Variable cost per year=114000*9.7=1,105,800
Total Cost per year=319000+1105800=1,424,800

Let the bid price per case ...

Solution Summary

Solution provides the step by step methodology to estimate the minimum bid price in the given case.

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