To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems.
Alson Enterprises needs someone to supply it with 117,000 cartons of machine screws per year to support its manufacturing needs over the next 5 years, and you've decided to bid on the contract. It will cost you $608,400 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 5 years, this equipment can be salvaged for $39,000. Your fixed production costs will be $187,200 per year, and your variable production costs should be $6.63 per carton. You also need an initial investment in net working capital of $58,500. Your tax rate is 33 percent and you require a 18 percent return on your investment. Assume that the price per carton is $10.
Required:
(a) The project NPV is $. (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))
The answer is: -70441.85
(b) You can supply cartons per year and still break even. (Round your answer to the nearest whole number. (e.g., 32)) Hint: It's less than 117,000 units.
(c) If you supply 117,000 cartons per year, you can afford as much as $ in fixed costs and still break even. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16)) Hint: It's more than $187,200.