1. Consider a project to supply 100 million postage stamps per year to the USPS for the next five years. To pursue the project, you will need to install $4.1 million in new manufacturing plant and equipment. This will be depreciated straight-line to zero over the project’s five years. The equipment can be sold for $540,000 at the end of the project. You will also need $600,000 in initial net working capital for the project and an additional investment of $50,000 in every year thereafter. All net working capital will be recouped at the end of the project. Your production costs are $.005 per stamp and you have fixed costs of $950,000 per year. If your tax rate is 34% and your required return is 12%, what bid price should you submit on the contract?
2. McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $735 per set and have a variable cost of $365 per set. The company has spent $155,000 for a marketing study that determined the company will sell 75,500 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,000 sets per year of its high-priced clubs. The high-priced clubs sell at $1,250 and have variable costs of $590. The company will also increase sales of its cheap clubs by 11,500 sets per year. The cheap clubs sell for $345 and have variable costs of $130 per set. The fixed costs each year will be $11,250,000. The company has also spent $1,050,000 on research and development for the new clubs. The plant and equipment required will cost $24,850,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,550,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 14 percent. Find NPV, PI, and payback period. Perform sensitivity and scenario analysis for this project.