Problem: Dunder-Mifflin, Inc is analyzing the potential profitability of three printing jobs put up for bid by the State Department of Revenue:
1. the company's marginal city plus state plus federal tax rate is 50%
2. each job is expected to have a 6 yr. life
3. firm uses straight line depreciation
4. the average cost of capital is 14%
5. the jobs have the same risk as the firms other business
6. the company has already spent $60,000 on developing preceding data.
This $60,000 has been capitalized and will be amortized over the life of the project
A. What is the expected bet cash flow each year
B. What is the net present value of each project? On which project if any, should the company bid?
C. Calculate the profitability index
Job A Job B Job C
Projected winning bid (per unit) 5.00 8.00 7.50
Direct cost per unit 2.00 4.30 3.00
Annual unit sales volume 800,000 650,000 450,000
Annual distribution costs 90,000 75,000 55,000
Investment required to produce annual volume 5,000,000 5,200,000 4,000,000