ABC International Ltd. (ABC) plans to bid on a contract to sell 10,000 finger print recognition units a year for 4 years to Bank of China. Due to technological improvement, beyond the 4 years, the finger print recognition units will be outdated and no sales will be possible. The equipment necessary for the production will cost HK$2.4M, and will be depreciated on a straight-line basis to a zero-salvage value. Production will require an investment in net working capital of HK$75,000, and equipment can be sold for HK$200,000 at the end of production. Fixed costs are HK$500,000 per year, and variable costs are HK$165 per unit. In additional to the contract, ABC believes that they can sell 3,000, 6,000, 8,000, and 4,000 additional units to other banks in Hong Kong over the next 4 years, respectively, at a price of HK$275. This price is fixed. The tax rate is 16.5%, and the required return is 13%. Additionally, the CEO of ABC will only undertake the project if it has an NPV of at least HK$100,000.

a.What is the total cash flow in each year? (15 marks)

b.What bid price should ABC set for the contract? (10 marks)