Problem:
Dahlia Enterprises needs someone to supply it with 122,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you%u2019ve decided to bid on the contract. It will cost you $890,000 to install the equipment necessary to start production; you%u2019ll depreciate this cost straight-line to zero over the project%u2019s life. You estimate that in five years, this equipment can be salvaged for $72,000. Your fixed production costs will be $327,000 per year, and your variable production costs should be $10.50 per carton. You also need an initial investment in net working capital of $77,000.
Required:
Question: If your tax rate is 34 percent and your required return is 10 percent on your investment, what bid price should you submit?
Note: Show supporting computations in good form.