5. 25.

Calculating a bid price [LO 10.3] Consider a project to supply 100 million postage stamps per year to the Australian Post Office for the next five years. You have an idle parcel of land available that cost

$750 000 five years ago; if the land were sold today, it would net you

$1 125 000 after-tax. The land can be sold for $1 295 000 after taxes in five years. You will need to install $5.1 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 project’s five-year life. The equipment can be sold for $450 000 at the end of the project. You will also need $425 000 in initial net working capital for the project and an additional investment of $50 000 in every year thereafter. Your production costs are $0.38 cents per stamp and you have fixed costs of $1.1 million per year. If your tax rate is 30 per cent and your required return on this project is 10 per cent, what bid price should you submit on the contract?