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2. Your company is a manufacturer of roller bearings used in passenger cars and trucks. You are preparing for a bid to supply bearings to
2. Your company is a manufacturer of roller bearings used in passenger cars and trucks. You are preparing for a bid to supply bearings to an automobile company. The contract calls for 2,000,000 bearings over the next five years. The cost of equipment necessary for the production is $4,000,000. You will depreciate the $4,000,000 cost straight-line to zero over the project's life. You estimate that this equipment will have a before-tax salvage value at the end of the project of $1,600,000. The fixed production costs will be $1,000,000 per year, and the variable production costs should be $10 per unit. The project also requires $500,000 in initial investment in net working capital, which is fully recoverable at the end of the project. The tax rate is 25 percent. The project's required rate of return is 16 percent. Note that the project only depreciates the $4,000,000 initial cost. The salvage value is excluded from depreciation. Find the price that makes the net present value (NPV) of the project equal to $3,000,000
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