A common use of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPW equal to zero and find the required price. Thus the bid price represents a financial break-even level for a project.

Home Depot requires a supplier for 150,000 cartons of machine screws per year for its local Ann Arbor stores. You have decided to bid on the contract. It will cost you $780,000 to install the equipment necessary to start production. You will depreciate this cost using the straight-line method. You estimate that after 5 years, this equipment can be salvaged for $50,000. Your fixed production costs will be $240,000 per year and variable production costs should be $8.50 per carton. You also need an initial investment in net working capital of $75,000 to cover various administrative costs.

(a) If you require a 15-percent return on your investment, what bid price should you submit. Begin by finding the annual required revenue if you participated in the contract.

(Hint, write this in terms of the NPW equation.)

(b) Determine the break-even amount assuming the required rate of return.