Assignment:
Consider a project to supply 101 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,910,000 five years ago; if the land were sold today, it would net you $2,110,000 aftertax. The land can be sold for $2,310,000 after taxes in five years. You will need to install $5.41 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's five-year life. The equipment can be sold for $510,000 at the end of the project. You will also need $610,000 in initial net working capital for the project, and an additional investment of $51,000 in every year thereafter. Your production costs are 0.51 cents per stamp, and you have fixed costs of $1,060,000 per year.
Task:
Question: If your tax rate is 35 percent and your required return on this project is 11 percent, what bid price should you submit on the contract?
Note: Explain all calculation and formulas.