Calculating a Bid Price [LO3]

Consider a project to supply 100 million postage stamps per year to the U.S. Postal

Service for the next five years. You have an idle parcel of land available that cost

$850,000 five years ago; if the land were sold today, it would net you $1,080,000 after-

tax. The land can be sold for $1,150,000 after taxes in five years. You will need to install

$4.6 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 projects five-

year life. The equipment can be sold for $400,000 at the end of the project. You will also

need $600,000 in initial net working capital for the project, and an additional investment

of $50,000 in every year thereafter. Your production costs are .45 cents per stamp, and

you have fixed costs of $1,200,000 per year. If your tax rate is 34 percent and your

required return on this project is 12 percent, what bid price should you submit on the

contract?