The managers of Poncho Parts, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next 5 years. The necessary foundry and machining equipment will cost a total of $800,000 and will be depreciated on a straight-line basis to zero over the project’s life. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labor and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate.
A. What is the minimum bid price they can quote on this project?
B. Following up on the above, how are the results affected if addition to net working capital is $50,000 in year 0 and $50,000 in year 1? A numerical answer is required.
C. How are opportunity costs and side effects affect capital budgeting decisions?