Question
Canyon Buff Corp. has decided to ask suppliers to bid on the 150,000 cartons of precision machine screws that Canyon Buff needs to purchase per
Canyon Buff Corp. has decided to ask suppliers to bid on the 150,000 cartons of precision machine screws that Canyon Buff needs to purchase per year to support its manufacturing needs over the next five years. You have decided to submit a bid to supply the machine screws.
- It will cost you $780,000 to install the necessary equipment which will be fully depreciated (means salvage value is zero) over a straight line basis over five years. - Incremental Selling, General & Administrative expense will be $240,000 a year and variable costs will be $8.50 per carton. - All sales and raw materials purchases will be made in cash however you will need $75,000 in raw material inventory to begin the project thereafter NWC will stay constant over the five years until the end of the project where you will no longer need the inventory. - You have a 16% cost of capital and a 35% tax rate.
Question 1:
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?
Question 2:
Use the In-class exercise from Lecture 7 (be sure to use the excel file from Unit 7) for this problem. Assume that everything is the same for the project except the marginal tax rate is now 35%. What is the new NPV?
Question 3:
Use the In-class exercise from Lecture 7 (be sure to use the excel file from Unit 7) for this problem. Assume that the cost per unit can be decreased to $12 by using cheaper raw materials to produce the shelves. As news of the lower quality shelves spreads, we also expect that units sold will decrease by 7% per year. All other assumptions remain the same. What is the new NPV?
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