Consider a project to supply 116 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 $2,060,000 five years ago;
if the land were sold today, it would net you $2,260,000 aftertax.
The land can be sold for $2,460,000 after TAXES in five years. You
will need to install $5.56 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 projectAc??cs
five-year life. The equipment can be sold for $660,000 at the end
of the project. You will also need $760,000 in initial net working
capital for the project, and an additional investment of $66,000 in
every year thereafter. Your production costs are 0.66 cents per
stamp, and you have fixed costs of $1,040,000 per year. 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?
Please explain your answer. Thanks
This question was answered on: Dec 08, 2020
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