Assumptions Cost of Capital = 16% Tax Rate = 35% Unit Sales = 150,000 Price per Unit= $12.11 Cost Per Unit = $8.50 Sales Growth = 0% Capital Expenditure $780,000 Annaul Depreciation $156,000 Year 1 2 3 4 5 Unit Sales 150,000 150,000 150,000 150,000 150,000 Sales $1,815,953 $1,815,953 $1,815,953 $1,815,953 $1,815,953 Cost of Sales $1,275,000 $1,275,000 $1,275,000 $1,275,000 $1,275,000 Gross Profit $540,953 $540,953 $540,953 $540,953 $540,953 Selling, General & Admin. $240,000 $240,000 $240,000 $240,000 $240,000 Depreciation $156,000 $156,000 $156,000 $156,000 $156,000 EBIT $144,953 $144,953 $144,953 $144,953 $144,953 Income Tax $50,733 $50,733 $50,733 $50,733 $50,733 Unlevered Net Income $94,219 $94,219 $94,219 $94,219 $94,219 Add Back Depreciation $156,000 $156,000 $156,000 $156,000 $156,000 Subtract Capital Exp $(780,000) $- $- $- $- Subtract Change in NWC $(75,000) $- $- $- $- $75,000 Free Cash Flow $(855,000) $250,219 $250,219 $250,219 $250,219 $325,219 Discount Factor 0.86207 0.74316 0.64066 0.55229 0.47611 FCF Present Value $(855,000) $215,706 $185,954 $160,305 $138,194 $154,841 NPV 0 Required NWC $75,000 $75,000 $75,000 $75,000 $75,000 $- Change in NWC $75,000 $- $- $- $- $(75,000) Cash Flow Impact of change in NWC $(75,000) $- $- $- $- $75,000 Present value $(75,000) $- $- $- $- $35,708 PV(Cash Flow Impact of change in NWC) $(39,292) PV(Cash Flow Impact of capital expenditure) $(780,000) Present value $134,483 $115,933 $99,943 $86,157 $74,274 PV(depreciation) $510,790 "NPV = PV(cash flow impact of capital expenditure) + PV(cash flow impact of change in NWC) + PV(cash flow impact of net income and depreciation) " 0 Economic break-even requires NPV=0 PV(cash flow impact of net income) $308,502 which is PV(unlevered net income from Year 1 to 5) Denote unlevered net income by letter C, then PV(unlevered net income from Year 1 to 5) = C * Present Value Annuity Factor Present Value Annuity Factor =1/r * (1-1/(1+r)^N), where r=0.16, N=5 3.274

Use the Price-Bidding exercise for this question. Assume the variable cost of producing the cartons of precision machine screws is $9 and all other assumptions remain the same.

What is the new minimum price for your bid?