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Calculating bid price for shirts using NPV

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Question # 1

Filkins Fabric Company (FFC) needs to provide 8,300 shirts each year to a local organization in Toronto for summer events for the next eight years. The company will require a new printing machine that will be able to print on the shirts. The new printing machine will cost $225,000 including installation and training costs of $17,000. The fixed cost of production are $21,200 and variable costs are $2.65 per shirt. Filkins will require an additional investment, which will lower the company's net working capital by $9,800 in the beginning of the project. The working capital costs will be recaptured at the end of the project's life. FFC assumes a discount rate of 13%, the CCA rate on the equipment is 15%, the tax-rate is 35%, and the machine will have a $6,700 salvage value. What bid price per shirt should Filkins Fabric Company offer to this organization?

Solution Preview

We need to find out the NPV of the project. A selling price which gives NPV=0 would be the minimum bid price that can be offered. This is so because at NPV=0, all the cost are met. NPV less ...

Solution Summary

The solution explains how to calculate the minimum bid price using NPV