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(Solution Download) Consider a project to supply 116 million postage stamps per year to the U.S. Postal Service for the


 

 

 

 

 

 

 

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

 

 


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